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Comment by kasey_junk | Hacker News Reader

It is a small piece of what they do, and there are a few bad actors in HFT. That said, Lewis literally just gets it wrong on what is happening in his front running accusations. Either he doesn't understand what is actually happening or in an effort to simplify and/or make a compelling narrative he misrepresents the actual market movements that are happening.

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The HFT firms have statistically significant deviations in terms of profitable trading days.

For instance, Virtu had 1238 straight trading days of profitability, with no losses.

There are no other firms in the history of Wall Street with such success. Such an outlier deserves a lot of scrutiny.

It might help if you expanded on your views of why Lewis is wrong.

Virtu basically only does market-making which is a low risk trade. You put on small positions with a tiny statistical edge hundreds of thousands of times a day to make the bid-ask spread. It's like flipping a coin that comes up heads 50.05% of the time and betting $1 on it a million times a day. If something breaks or loses too much you exit your risk and turn off for the day. If a stock doesn't work in the portfolio, you take it out. If strategies or markets stop making money, you turn them off. Even if they buy a company that goes bankrupt, their notional position is less than their daily profit firm-wide.

Firms that make markets basically make money trading every day absent technology issues. That doesn't mean the company itself is profitable every day. It costs a lot of money to build the technology and strategies, and for every Virtu out there, there's a dozen failed HFT startups.

We have to be very careful about our terminology when we talk about profitability of trading days. I have not inspected Virtu's trades, pnl statements, or legal documents related to them, so this is less about them specifically than about trade pnl generally.

When most firms talk about profitability of trading day, they are talking about the the profitability of just their trades. That is, if they bought for 1 million dollars and sold for 1 million and 1 dollars. That is technically a profitable trading day. If the cost of entering and exiting that trade cost them 2 billion dollars they will still mark that as a "profitable" trading day, even though it clearly isn't.

That is to say, it is trivial under this accounting scheme to come up with a strategy that has no losses. Just don't trade.

I apologize for not going into more depth about why I think Lewis is wrong. I've explained it a lot in my comments on HN lately and can't be bothered to do it again. That said, if the linked article was more professionally presented and didn't have the weird racial language the points are basically what I would argue against Lewis' premise.

I've looked through your comments on this post and did not find anything that looked like an explanation or refutation of Lewis' claims that HFT were front running. Maybe I missed it or you were talking about another post. Why don't you create a blog post? That way you can point people to it and you won't have keep repeating yourself.

Edited for clarity.

https://gist.github.com/harryh/9996284

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