Hacker News Reader

Comment by CyberDildonics | Hacker News Reader

Anyone who thinks HFT is something needed should go read Flash Boys. HFT is basically front running with some variations. There is a small amount that is necessary arbitration that will have to be done at some speed, but by and large it is not performing any sort of a service, it is taking advantage of the people trying to buy and trade stock by being a manipulative middle man.

View on HN

There are three sentences in this comment. The first two are wrong, and the third is hard to understand, but if I understand it correctly, it too is false.

1. _Flash Boys_ has been panned by technical experts and makes very little sense to people with a basic understanding of how the markets work. I can link to technical reviews if you'd like to see them. I'd be interested in any technical reviews of the book that defend it; I haven't seen any. As a fan of Michael Lewis: this book was surprisingly bad.

2. Front-running is an agency problem. It's what happens when your broker knows you're about to move a lot of stock and, acting on that insider knowledge, jumps in front of your trade. Market-making isn't front running. To make a colorable argument that HFTs are frunt-runners, describe a hypothetical sequence of trades in which that happens ("BOB BUY 10 @ $10, CAROL SELL 10 @ $10.01, &c"). If HN history is any guide, that exercise will quickly deflate the notion that there's front-running (or even any unfairness) happening.

3. HFTs were preceded in the markets by the human specialist system, in which people deliberately increased the spreads to scalp money from trades. HFTs fight over pennies. Human specialists rigged the stock markets so that every share included a premium denominated in dimes and quarters paid directly to the specialists.

Could you please link to the technical reviews you mentioned? I would be very interested to read them because as an outsider, Flash Boys seemed overly simplistic, but I haven't been able to figure out what the real story is yet.

Here's a good free starting point:

http://www.amazon.com/review/R3PJO6KJGRMWUE/ref%3Dcm_cr_pr_v...

Again: a single positive technical review would be interesting. I'm not being hyperbolic: I haven't read a single one. The sense I get is that everyone who's ever formatted a FIX message thinks _Flash Boys_ is terrible.

The 2nd-to-last slide[1] compares the IEX "speed bump" to other anti-HFT measures: "Ingenious, eliminates sniping. But, only works while IEX is small relative to the rest of the continuous market (free-rides off price discovery elsewhere)."

1. http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...

I replied to this but now I'm uncertain about my response and am rereading. This is neat, thanks!

So if all this is so great, how come so many people are going to great lengths to eliminate HFT with the exception of the people that make money from it? If it was offering such a valuable service, wouldn't people want it to be there even if they weren't the ones profiting from it? Flash Boys has been panned by HFT people, not people trying to trade stock fairly.

Simple: pursuit of the status quo ante.

HFT ate the lunch of the people who benefited most from the old system: giant broker-dealers (investment banks) who made grotesque fees for the simple service of shopping large blocks on behalf of pension and mutual funds. Those funds now get better service without special fee-collecting agents.

_Flash Boys_ was not just panned by HFT people. Where are you sourcing that objection from?

It sounds like you are confusing straight electronic trading with HFT. Brokers aren't necessary and neither is having someone able to execute trades with sub millisecond latency.

Also, why do you keep putting underscores around Flash Boys?

You asked a straightforward question. I answered it. I don't understand your followup questions, and so will leave it at that.

Nothing in this comment contradicts or disproves that front running can and is happening. Flash Boys described a large order going to an exchange and HFT firms seeing that, buying stocks on other exchanges before the real purchaser, and selling them back to the real purchaser after the first exchange they get to can't fill their large order. HFT firms know there will be buy orders at the other exchanges and they run out in front of those buy orders to become a middle man. That is the very definition of front running and it was obviously happening. Do you have information that directly contradicts this?

First, that's not the definition of front running, and second, the expectation that a large order can trade atomically has never been valid, and, if you consider the computer science behind it, can't be valid.

If that isn't front running, then what is? And if you wouldn't call that front running, what would you call it? You haven't offered anything to back up any of what you've said.

All I'm saying is that sub-millisecond HFT is only useful to the people doing it and no one else. People defending HFT as being necessary and helpful is ridiculous. Even an exchange where orders go in over the course of a second, are matched up within the exchange, then traded, would not offer latency to a person, but would offer everyone a chance to sync with the exchange cycle and submit their orders with enough time to be matched. If all the exchanges someone was trying to use worked this way it would offer no disadvantage to a human trader, but would make the HFT arbitrage much less lucrative.

Like I said upthread: front-running happens when a broker takes an order for a client and, before submitting it to the market, trades against that order. Front-running is an agency problem.

An HFT firm doing that would get fooled by activity on one exchange which resembled part of a large order being filled, but didn't actually propagate to other exchanges. These firms are doing a sort of high-frequency gamble, whereas a broker acts on certain information to which only they are privy before its execution.

There is a huge gulf between "there exists bad behavior that can fairly be called HFT" and "all HFT is bad behavior." Even if we agree that the behavior you describe is bad (it's not "front running" - that has a particular other definition), much HFT does not resemble that.

Mistakes aside, the weirdest thing about Flash Boys, to my mind, is that it's cast as a David vs. Goliath narrative - with the role of "Goliath" filled by the awful HFT shops and "David" by Goldman Sachs and J.P. Morgan. When "David" is orders of magnitude larger than "Goliath" and tends to swing the industry by the tail, it's an odd framing.

Reply on news.ycombinator.com