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A High Frequency Trader's Apology, Pt 2

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Re: A High Frequency Trader's Apology, Pt 2

#131

Post by boxy_brown »

harryh wrote: post #86

Additional evidence that HFTers are not stealing from speculative investors: Anyone can start a market. If HFTers were stealing pennies someone would have come along and started a market that banned HFTers (or changed the rules to otherwise get rid of them). Then all of the speculative investors would use this market instead since they could be assured that no one was siphoning off pennies on every trade. Eventually…

Your comment is conjecture, not evidence. It's an invalid conjecture, because it makes sweeping assumptions about some of the most complicated, chaotic properties of securities markets. And it's incorrect.

There are market centers that prohibit high frequency traders. Reg NMS requires any center that disseminates quotes to prohibit trading through the NBBO (best price at any point in time across all exchanges). So these market centers must be dark pools, not exchanges nor ECNs.

These centers represent a small and shrinking amount of trading volumes. Nonetheless, they exist.

Re: A High Frequency Trader's Apology, Pt 2

#132

Post by ynniv »

My understanding is that HFT has been used for frontrunning (which is undeniably stealing pennies), and associated with unintended market instability (flash crashes) due to unforeseen trader interactions. This post primarily defends algo trading, which does not have the negative connotations of HFT.

The author claims speed is mostly important for order precedence, but I find this to be a naive view. The potential upside for a trader coming to a conclusion and executing a trade first is minute compared to the potential for frontrunning trades that have been executed but not yet communicated to the market. Yes, this kind of frontrunning requires (sometimes[1]) automated illegal eavesdropping on secure financial transactions, and is highly immoral and illegal. But you don't make $100M a day without compromising some morals[2].

Algo I'm okay with, but HFT is a fancy toy for messing with the markets.

[1 | http://zerohedge.blogspot.com/2009/07/is-goldman-legally-fro...]

[2 | http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a... ]

Re: A High Frequency Trader's Apology, Pt 2

#133

Post by soup10 »

tptacek wrote: post #116
soup10 wrote: post #113

Earlier quoted context omitted.

Well the question is what's the point of the stock market and financial sector if the only time investment is really happening is when shares are offered. The answer the parent suggested is that the stock market provides liquidity that is necessary for people to be willing to invest. I believe that most stocks have far far more liquidity than is necessary for people to feel comfortable investing in them. More liquidi…

I don't understand. "Liquidity" is another way of saying "cost of trading". You're saying, "most stocks cost so little to trade that people are already willing to trade them, so why upset the applecart for people who make a profit scalping off those trades"?

I'll say it very simply: People insist that more liquidity is a good thing. I'm saying it's not that good, and we have plenty of liquidity already. Companies that do HFT(and otherwise provide more liquidity) are part of the larger problem of financial companies that hire a lot of smart people and make them do work that has little value to society, but happens to be very profitable.

Re: A High Frequency Trader's Apology, Pt 2

#134

Post by grandalf »

jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on.

This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction".

If none of your local group (with whom a trade would incur no transaction cost) wants it, then it goes through to the wider market where it may or may not find a counterparty.

The 0.5 second time limit is arbitrary, chosen to accomodate a range of latencies for the various local would-be-counterparties.

Nobody is stealing anything. It's just a way around some of the fees that one willingly pays for harder to fill orders. If an entity on your local ETN has a market making strategy where he/she is willing to fill some orders, then a flash order rule can improve efficiency by removing transaction cost.

If you think this is a bad thing then you have a profound misunderstanding of its mechanics. Ironically, like most of the anti-HFT claims, your position benefits the old school establishment exchanges. ETNs are the little guys trying to compete against the big guys by offering better technology and lower transaction costs. Flash orders are part of their service to fight against the competition-stifling fees charged by the big guys to route electronic orders.

Re: A High Frequency Trader's Apology, Pt 2

#135

Post by [deleted] »

jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

[deleted]

Re: A High Frequency Trader's Apology, Pt 2

#136

Post by sailfrog »

jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

I am not a fan of flash orders but a few nit-picks:

- I believe you have to opt in to have your order flashed. You seem to be suggesting this is happening behind traders backs

- Only one market in the US still supports these types of orders. It may have happened hundreds of times while reading your sentence but that is a tiny fraction of executions occurring across all exchanges during that time-frame.

Re: A High Frequency Trader's Apology, Pt 2

#137

Post by [deleted] »

yummyfajitas wrote: post #51
rscale wrote: post #41

I have no objection to the provision of liquidity. That said, the flash crash seems to me to be a perfect example of a danger created when liquidity is provided largely by algorithms. We ran into a situation where the market was already volatile, and a bad trade exacerbated the issue by causing a number of HFTs to take unexpected losses and withdraw from their markets, consuming further liquidity while driving prices…

Flash Crashes are not a phenomenon caused by algorithms. We have actually had two flash crashes - the first was in 1962. http://online.wsj.com/article/SB1000142405274870395760457527... Also, the main reason many HFTs pulled out of the market is the risk of broken trades (regulatory risk [1]). Staying in the market would have been a big moneymaker absent that risk - spreads were often huge. But broken trades were dang…

[deleted]

Re: A High Frequency Trader's Apology, Pt 2

#138

Post by yummyfajitas »

boyd wrote: post #126
yummyfajitas wrote: post #102

Earlier quoted context omitted.

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

That example, however, it not solely germane to ultra-HFT. More traditional market makers have provided that level of liquidity for a long time. Do you have an example of where sub-100 ms execution truly adds significant liquidity? I'm open to listening, but have never heard a convincing case for why HFT below such a time threshold adds net value (i.e., enough to make up for the volatility it can cause). Edit: Change…

That example, however, it not solely germane to ultra-HFT. More traditional market makers have provided that level of liquidity for a long time.

The studies I link to provide compelling evidence that traditional market makers provided much lower levels of liquidity.

Do you have an example of where sub-100 ms execution truly adds significant liquidity?

Please reread my post starting from the words "The Latency Arms Race".

Re: A High Frequency Trader's Apology, Pt 2

#139

Post by [deleted] »

yummyfajitas wrote: post #120
rscale wrote: post #117

Earlier quoted context omitted.

Your described scenario with Accenture doesn't describe a market-making HFT strategy. You're describing something akin to a mean-reversion algorithm that would be MFT or slower, and is not a market-making strategy. It demands that you buy and hold inventory to profit. It doesn't provide liquidity. Of course you can make a huge profit when a crash occurs, whether that crash is due to a vicious circle of algorithms, or…

Your described scenario with Accenture doesn't describe a market-making HFT strategy. The HFT could have placed a passive buy order at $1.00 and a sell at $30.00 (or at $2.00, which he revised upwards as the price corrected).

[deleted]

Re: A High Frequency Trader's Apology, Pt 2

#140

Post by jellicle »

grandalf wrote: post #134
jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on. This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction". If none of your lo…

>There is nothing malicious or underhanded going on.

And yet most market participants think banning them is a no-brainer.

http://blog.themistrading.com/when-exchanges-attack/

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