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Comment by crag | Hacker News Reader

It's a big deal to everyone who is not a "professional" trader. Oh and by the way, HFT mostly trade low volume at high speed. In other words, trading 5 shares of Apple 5 million times an hour. That makes money. It's not about the big pay-off. It's about the pennies all adding up. And also explain why the stock was wildly moving all over the place.

Personally I think this type of trading should be illegal. Right now, unless you have a data center right next to the exchange you are trading at a disadvantage. And it just adds to the many reason why I think the game is rigged. To favor the big houses. You're almost better off at Vegas.

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In my experience HFT is a boogeyman. It's not well understood, and it's easy to blame for ills real and imagined - in part because you only tend to hear about it when something goes wrong and a Knight Capital type event happens, although that can apply to any firm that does any form of automated trading such as Market Makers and Algo traders and is definitely not the sole preserve of HFT shops. Based on what I know and see, I believe that the existence of HFT is generally an aid to price discovery (due to the narrower spreads), and liquidity (more actors means a better chance that someone will take the other side of a trade). In that respect, they're not too dissimilar to Market Makers, although a true market maker has additional responsibilities in terms of being willing to trade in illiquid products.

If you're not a professional trader then the topic of the article really isn't a big deal. If your trading style is such that it's significantly material whether you trade at 510 or 511, or whether your trade executes in the next minute or the next thirty minutes, then you're always going to be at a huge disadvantage compared to people who can get the best price and most immediate execution. A trading firm who are willing to pay to connect directly to an exchange will always get a better price than you can.

It's not horribly different to why the restaurant down the block from you gets better prices for produce than you do - their business affords them better access to the produce market.

Edit - For what it's worth, the bulk of my career has been in finance, mostly as a Quant-Developer at a mix of buy-side and sell-side firms and more recently as technology consultant who specializes in Capital Markets.

Yes, the never ending and hard to pin down boogeyman. Today it's HFT, tomorrow it's day traders, the next private equity. All these thing are so evil, so easy to do, and the people who do them are making so much money, which should be our money really because they're robbing our 401Ks blind.

Of course, I'm being sarcastic, but this is what media is selling and most people are buying it without any pause for reflection.

There is an obvious problem with HFT: it gives an advantage to lower latency analysis and communication, leading to huge amounts of wasted effort getting faster pipes and software, co-locating automated trading, etc. None of this is delivering real value to the economy, as far as I can see. If you have an argument for why trades that happen at millisecond time scales help liquidity and price discovery over what you'd get with a system that handled trades on the scale of minutes, I'd like to hear it. I have a hard time imagining that the benefits (to society at large) could outweigh the costs of the waste when I see what's being done.

That said, I agree that the high frequency of trades themselves are probably not the problem. The problem is rewarding a latency/processing advantage.

If a HFT firm makes a profit then they are, by definition, adding value to the economy.

All that technology investment is not a waste; it allows firms to condense money out of information asymmetries with ever greater efficiency.

Edit to add: if you prefer industries that build "real things" then look at the revenue that HFT delivers to companies who make high-speed networking and computer equipment.

Economic value is a measure of the benefit that an economic actor can gain from either a good or service (first sentence at http://en.wikipedia.org/wiki/Value_(economics) ).

My post was comparing the current system that allows millisecond scale trading with a hypothetical one that slows trades down to something on the order of minutes. Your observation that people are willing to pay to exploit information asymmetries in the current framework doesn't address the question of how my proposed change would affect net economic value.

The metric of measurement is wealth, which profits create.

Your proposed change would reduce the benefit because it would eliminate the profit (wealth) that HFT firms create.

Your proposed system is not hypothetical; it is how all trades used to happen. HFT did not arise from nothing. People developed it because it created new profit in addition to that generated by slower trading.

Are you seriously claiming that profits create wealth but counterparty losses don't destroy wealth???

Are you claiming that the stock market is zero sum?

Suppose I'm a speculator willing to pay $0.03/share for liquidity. It's valuable for someone (I don't care who) to provide that liquidity.

If HFTs were all 100ms slower, I wouldn't care. But if HFT 1 is 100ms slower than HFT 2, then HFT2 will capture $0.03/share and HFT 1 captures nothing. It's a wasteful arms race. It's also fixable simply by eliminating the subpenny rule.

http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html

Eliminating the subpenny rule sounds like a good idea, but it wouldn't address the advantage of responding to news quickly, would it?

It's not that it would eliminate it, but it would make the margins to due pure latency arbitrage so small as to make it not worthwhile (in theory anyway).

That said, there is and always will be an advantage to players that can respond more nimbly to changing market conditions (news being one input to this) and there is no inherent problem with that (and there may be lots of positives to the market as a whole).

Have you considered this post in light of the inverted exchanges BYX, EDGA, and BX? You can effectively make your liquidity cheaper by posting to an exchange with an inverted fee schedule (pay to add, rebate when you take), but we still see the "latency arms race" at the traditional exchanges.

Moving the decimal point to the right just increases by 10x the volume necessary to create the same profit. I think a likely result would be massive consolidation to a couple big companies, who would then compete once again on latency but at much higher volumes.

If you're investing over anything approaching the short term then it is exactly like playing at Vegas, except the card counters aren't banned.

If you invest, i.e. over 10+ years then HFT doesn't matter other than giving you better liquidity and lower spreads. There is much, much less competition in that space, no computer trading and you are capable of actually doing research.

Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable.

Individual investors tend to outperform the market with a 20 day holding period, with "stocks experience statistically significant excess returns of 0.80% in the 20 days following a week of intense buying by individuals, and −0.33% following a week of intense individual selling" [1]. The individual excess returns are attributable to the "contrarian tendency of individuals leads them to act as liquidity providers to institutions that require immediacy," as evidenced by "the magnitude of the excess returns" being "greater in less liquid stocks."

Shorter than 20 days and individuals compete unfavourably with professional traders' infrastructure. Longer and they compete unfavourably with the skill of professional asset managers.

[1] http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2008....

The number of professional asset managers who actually invest for periods exceeding a year is surprisingly tiny. The number of firms (especially American) that wouldn't fire someone who didn't consistently meet/beat expectations each quarter is low.

I work for a proper long term investing asset manager and we are very happy with the lack of competition in our space.

Short term "investors" are really speculating, which is fine, but call it what it is. There's also nothing wrong with using professional managers to look after your money as well, picking individual stocks takes time and paying someone else to do that is perfectly sensible. Just pick someone who genuinely invests for the time period you want to invest with them for.

>If you invest, i.e. over 10+ years then HFT doesn't matter //

Is there any proof of this. How long have we had this sort of HFT?

Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value. Yes, liquidity, yadda-yadda but surely market liquidity is no greater now but HFT is far more effectively removing money (a proxy for the value extracted).

In other words other people are creating value and HFT is a sink for it. The bar to entry to the HFT camp means there should be an overall movement of capital towards the most wealthy in this sort of system.

HFT extracts the value from transactions. It won't extract the value from a company becoming twice as valuable.

Invest because you think the company is going to be successful and thus more valuable. The actual amount of stock that is HFT traded is tiny relative for each company, long term price is driven by what institutional investors are willing to pay for actual percentages of a company.

Why are the other people creating value, while HFT traders do not? Both types of players extract value from the market, while improving market efficiency.

HFT definitely has high entry costs (10's of millions of dollars), and firms that aren't serious about HFT can't participate. Note that HFT only makes 2 billion a year, so they aren't actually missing out on that much. HFT just isn't a very big space, compared to long term investing, and doesn't represent very much movement of capital. (The wealthy don't really invest in HFT, since HFT firms generally don't accept outside capital, or need any substantial amount of capital to operate)

>Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value.

Can you explain how that works?

I'm fine with and agree with that, but my fear is that the transition of the exchanges to public companies (which in turn drove the embracing of HFT) and proliferation of HFT is skewing the market one way or the other.

When you have an environment when 45% of the trading activity for a heavily traded stock is obscured for many years, I don't have the ability as a layman to figure out what that means to me and the pricing of the equity.

Many folks would respond "than you shouldn't be investing in individual stocks", but still, if I'm investing in large-cap ETFs, I own plenty of Apple shares as well as other companies that may be affected by this information asymmetry.

When you have an environment when 45% of the trading activity for a heavily traded stock is obscured for many years

I'm not sure what you mean by "trading activity," but this article says 45% of the trades, _not_ 45% of the volume. We don't know what fraction of volume because the author doesn't bother to tell us. That's why the article is crap. It makes a bunch of extremely contentious claims and doesn't answer any of the important questions.

"Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable."

Agreed.

Many people are in company mandated 401ks (full of conflicts of interest between the trustee and the trustee's own funds) that don't have the option to buy and hold a single stock for 10 years.

Generally, HFT firms end up decreasing volatility. They price stock more accurately, which makes them money and decreases volatility. If they were increasing volatility, they would make infinite money, since the source of their profit is the volatility.

The main scenario where HFT firms increase volatility is when their algorithms break (either due to a programming error, or because they cease to accurately model the market due to a change in market conditions). In that case, the misfiring algorithm will increase the market volatility, and lose the HFT firm money.

You absolutely right that firms without co-located data centers are at a disadvantage. Thankfully, this only really matters if you are trying to compete with HFT firms. So it's not a big issue for people who trade on a longer time scales. The HFT firms do make some money off of these long term investors, and in exchange provide increased liquidity, decreased spreads, and decreased volatility. (if the HFT firms weren't offering the best prices for the stocks, then the long term investors wouldn't be buying from them)

And, as I often point out to critics, you don't have to buy liquidity if you don't want to. Use ALO orders or just don't cross the spread.

http://usequities.nyx.com/markets/nyse-arca-equities/order-t...

Great, could you explain to me as a retail investor without direct access to the exchanges how to place an ALO order and to buy or sell without enriching HFT shops? (Hint: you can't.)

With a retail broker it's moot - they charge you a flat $8/trade regardless of whether you add or remove liquidity. You never collect rebates or pay to take liquidity.

You can still choose not to cross the spread with a retail broker. Just place limit orders on the right side of the spread.

Most retail traders actually get slightly (insignificantly) better prices for liquidity taking orders through price improvement at the wholesaler. Retail traders can also send post-only orders and participate in exchange the rebate/fee program on Interactive Brokers.

Hft market makers, the ones that thrive on collecting fees for for trading, are required to send orders in even lots. They can only send odd lots to hedge, and even that is a recent development.

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