71–80 of 132 posts
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I have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.
Unless you're a bank or have similar means you can't compete.
Of course you need money to compete. You need money to compete with Facebook too.
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Not exactly, a firm like Virtu makes money due to volume and volatility. If the market goes up, they make money, if it goes down, they make money. They don't make money when they break things, or when the volume (and volatility) is low. Source: Worked at Madison Tyler / Virtu for over 4 years, but left before their IPO.
Not sure I understand why we can assume that its all trades are entirely "independent" here. Agree with you that HFT performance is not correlated with market direction. But given the volume of trades it would imply that many of the trades are occurring on a smaller pool of equity instruments. I'd think that given liquidity constraints and competition that there's a sweet spot in terms of number of stocks that a give…
Most likely, though, their profitability % is tuned by edge and risk parameters. They can adjust size, widen out, or tighten up the spread to tune trade frequency and profitability. They are finding a sweet spot between # of trades and profitability.
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I can't help but to think the problem is being intentionally framed in an unhelpful way. The problem is their ability to front-run people. They shouldn't be able to get a more accurate view of the market than anybody else, and they certainly shouldn't have the chance to roll-back their actions after they get a glance of the results. Frequency of trading is irrelevant.
If an HFT firm was "front running" as you put it, and you know about it, why doesn't the SEC? Front running is not legal. Or are you using the Flash Boys definition of front run which is "anyone that trades better than me" or "anytime I try to buy 50,000 shares but move the price"?
I don't mean this as a comment on HFT or the law, I really don't know. I'm just pointing out that the SEC is bound by budgetary constraints and that litigation is very expensive, so they have to do cost/benefit analysis and prioritize the cases that are more likely to win.
And this is before political considerations come into the picture. News articles described the 'resident's SEC pick as being more interested in capital formation than enforcement; that seems a pretty reasonable assessment to me, given that S&C was representing Goldman Sachs during the epic CDO litigation, the cabinet is stuffed with GS alumni, and the administration's general attitude seems to be less regulation for more muscular and dynamic capitalism.
http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y...
I don't know why HFT exists at all. I would just pass a law that forces a bit of random latency/noice in the market data, in the order of seconds (in a similar way as GPS has artificial inaccuracy). Normal people are not gonna notice and all this HFT garbage is completely eliminated. Win win.
something like the Turquoise Uncross: http://www.lseg.com/sites/default/files/content/documents/TU...
to me this is a perfect example of how incredibly indifferent capitalism can be to creating value. no one is bad here, per se, but its useless as far as i can tell, and someone gets very very rich. nothing wrong with capitalism of course, but i feel the need to keep harping of the fact that it doesn't necessarily imply anything about value or desert. edit: every time i make a comment along these lines, its interestin…
- one effect of an economy is to find an approximate solution to an important problem: optimising resource allocation with regards to growth
- within this paradigm, markets exist to process all publicly available information and turn it into real allocation of resources
- considering the difference between trades executed once a day vs once a week, the more frequent trades will provide information that is up to date, higher resolution, and will lead to a better solution to the problem
- HFT uses a huge volume of very frequent trades based on very weak correlations, meaning that the information it adds is newer than that of longer term trades, is very high resolution, and may take into account factors ignored by longer-term strategies
- therefore, HFT leads to better overall resource allocation by providing greater visibility into the value of the things being traded
This ties into the comments on the efficient market hypothesis. HFT brings us a little closer to the impossible ideal by making the market a little more efficient.
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if you look at the market as a whole, there is a thing called the "efficient market hypothesis". It assumes that markets are perfect and you can not make money trading securities, because all information is already priced in. This is obviously not true, because HFT makes money, but you could say that HFT contributes to getting markets closer to being efficient. Having efficient markets is worthwhile for society becau…
You are not in a position to talk about people on high horses after posting that. There is quite a lot of research from the behavioral economics field (tl;dr: most people are somewhat irrational) that undercuts the EMH. Also, there's a lot of straw man argumentation in your post. Consumers can and do make sacrifices of utility in line with their values, even if such behavior is a standard deviation or two outside the…
There are companies that provide liquidity. They do nothing else. They don't take a position in the market. Its their job to quote both a bid and an ask and to trade with anyone who wants to hit those quotes. They are not allowed to not quote a price, unless trading is suspended. Those are called market-makers. They need to be able to change their quotes quickly, because being taken out on one side of the market creates positional risk for them. The only time they make money is when they can trigger a buy and a sell at the same time. If they cant do that, they have to hedge their position. They have to compete on spread with other market makers, which is possible to do in 2 ways - being fastest to quote or having a narrower spread. Trades at the price are executed in the order of submission.
There are companies that engage in statistical arbitrage. They look for opportunities that are statistical in nature. Think of technical analysis but in a way that works. Think stock A and stock B being more correlated than price reflects. They want to execute fast because those opportunities do not exist for long. This kind of trading smoothens out the curve and smooth curves are nice to have, mathematically speaking.
There are HFT firms who scalp dodginess in price by renting colocated servers. Very tiny but almost guaranteed returns if they can get execution. Nothing wrong with that either. Low margin business model.
Then there are companies, or rather teams inside companies, that send buy and sell orders into the exchange that they never want to execute, on millisecond timescales, to disrupt the market. They are trying, in simplified terms, to create signals for other market participants that do not really exist, and then execute trades that they know will be profitable by exploiting other participants for whom they generated buy signals. This is your evil HFT. The T in HFT is a misnomer, because they dont really trade. They abuse stock exchange mechanics to fuck with other market participants and then try to rob them. This is mostly illegal and not allowed by the exchanges themselves. The problem here is to prove that someone didnt play by the rules. Google "optiver the hammer" for an example of a couple years ago. They have counter-intelligence teams whose entire job is to not trade the market for profit but to ruin other companies profits to drive them out of business. But most of this is illegal, its just difficult to prosecute.
The problem with banning folks is that most trading companies engage in all of these things at the same time. There are market making teams at optiver and there are evil HFT teams at optiver and if you ban optiver, you wipe out a major market maker which leaves the stock exchange exposed.
Another problem with "banning HFT" is that where do you draw the line? Market participants can suddenly not try to get their trades executed anymore? Maybe that's beneficial to the market as a whole, but how do you even execute such a rule?
to me this is a perfect example of how incredibly indifferent capitalism can be to creating value. no one is bad here, per se, but its useless as far as i can tell, and someone gets very very rich. nothing wrong with capitalism of course, but i feel the need to keep harping of the fact that it doesn't necessarily imply anything about value or desert. edit: every time i make a comment along these lines, its interestin…
All that aside, I think I have some larger questions about your worldview: What does it mean to "create value?" By what standards is value assessed?
In the absence of any direct harm to another, under what circumstances should someone be deterred from engaging in profitable activity?
Is the assumption that profits accrue to those who provide value to others utterly false, or just false in this (and possibly other, isolated) case? If merely the latter, why in this case?
Note that the key assumption for why losses are unlikely is that they make many independent trades that are each likely to be profitable. But in real markets, outside events can suddenly make many trades all fail at the same time. This is the same reason AAA tranches of CDOs got those high ratings -- you only lose money if many obligations fail at once, but that is extremely unlikely if you think they have low correl…
Yeah, the analysis in this article is not really answering the question of WHY they are profitable every day; in reality, it is just explaining the law of large numbers. The whole thing rests on the premise that the company makes a profit on 51% of the trades, a loss on 24%, and break even on 25%. It is easy to show from those assumptions that you will never have a losing day if you make enough trades. The REAL inter…
Earlier quoted context omitted.
Trading firms create value by providing liquidity. If they can buy low and sell high, they will be buying when there are relatively fewer other buyers, and sell when there are relatively few other sellers. This activity creates value for other people who want to trade in those circumstances. If no value was created, there would be no value to capture. And the prima facie evidence that they are creating value is that…
> Trading firms create value by providing liquidity. Obviously true when they're added to market with little to no liquidity. But hard to see as true when you're adding them to market that is already extremely liquid. At least, it's a statement that needs some empirical justification in that case, to show that the value from marginal liquidity being added (which is tiny) offsets the waste of the incredible amount of…
It's true that at this point, now that market making is pretty much all automated, there isn't much more cost to squeeze out of this component of the market. But be careful not to imply that liquidity is binary: the more liquidity you have, the less it costs to buy or sell something.
Earlier quoted context omitted.
Trading firms create value by providing liquidity. If they can buy low and sell high, they will be buying when there are relatively fewer other buyers, and sell when there are relatively few other sellers. This activity creates value for other people who want to trade in those circumstances. If no value was created, there would be no value to capture. And the prima facie evidence that they are creating value is that…
I don't buy this argument, whose implicit corollary is that there can never be too much liquidity. I'm not an expert and don't have an opposing theory, nor do I want to do a bullshit refutation by just citing something I found in a few seconds on Google, but: I feel there must be some ideal level of liquidity, which is after all subject to laws of supply and demand like everything else. Cannot an oversupply of liquid…
You can mentally substitute "cost of trading" for "liquidity".
It's true that you can get costs down to a point where they don't matter. But I think you'll have an easier and more intellectually honest time engaging with the issue if you avoid the jargon and focus on the impact of the jargon. Cost is why we care about liquidity. As markets get less liquid, spreads increase, and the market takes inflicts more and more of a penalty on us for trading at all.