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High-Speed Trading Isn't About Efficiency—It's About Cheating

theatlantic.com

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Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#81

Post by CoolGuySteve »

gaius wrote: post #2

Lost me at That brings us to high-frequency trading (HFT) hedge funds. These funds use computer algorithms—a.k.a.: algobots No-one says this. I'm not involved in HFT myself but I know a bunch of people who are, there is a jargon word, but it's not that.

I'm in the industry, nobody calls it an "algobot". It sounds ridiculous and doesn't really express much.

I'm guessing someone was winding up the reporter, as from reading the article it seems obvious the person is in over their head.

Reminds me of the (possibly apocryphal) story of how a bunch of teenagers made fun of a 20/20 reporter by describing a made up word "mosh pit", and then it caught on.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#83

Post by brandynwhite »

michaelt wrote: post #11
tikhonj wrote: post #7

A few immediate thoughts: Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large…

See, here's the thing I don't understand about liquidity: If it's so valuable for trades to execute in microseconds instead of seconds, and the stock exchanges recognize this value and provide co-location etc to enable it, why are so many stock exchanges closed for half to two thirds of the day? [1] Surely the 15+ hour shut downs are a much bigger limit to liquidity than a few microseconds here and there? There's obv…

Can't agree more (focusing on microsec vs nights/weekends). It's not an excuse to say they need to train/test their algos, they have entirely separate machines for that. For any other tech company live rollouts are a fact of life. I'd suspect the reason is historical and based on a single person's practical workday, if you extend it to 24/7 then naturally you'd have to have several shifts. Same reason why they are closed on holidays, to give people a break. So I'd suspect it's to benefit the people involved and not the machines which I'm certain can be adapted.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#84

Post by philrapo »

Distributed exchange architecture is an interesting alternative:

https://ripple.com/blog/ripples-distributed-exchange-and-the...

When there's no central location towards which orders need to race to get time stamped, the whole low latency arms race seems unnecessary.

There's also no central place to co-locate servers.

Some of the existing traditional (centralized) exchanges are making 20-30%+ of their revenues from co-location and data fees. So they have little incentive to change. They cater to HFT because it's a big driver of their bottom line...

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#85

Post by d_jyllikoski »

jchendy wrote: post #69
Lazare wrote: post #59

Earlier quoted context omitted.

Kinda. A few points to help clarify things: All funds that go into the business will either be debt or equity. Debt gets a guaranteed rate of return, and needs to be paid back. It gets first claim if you go under, but gets no "bonus" if you do well. Equity is an ownership stake; last in line if you go under, but with a claim on all future profits if you do well. The most obvious type of equity stake is your own, but…

> If you owe 0.0001% of Amazon, you have the right to 0.0001% of all future profit they make. That totally makes sense for stocks that pay dividends, but how do you claim your 0.0001% of profits for stocks that don't?

When they decide to forgo paying dividends, that money is usually put to other uses by investing it (case Amazon) or stockpiled in cash (case Apple).

In both cases the value of your 0.0001% slice has increased, and even though you won't get an instant transfer of that value, you will see it in the appreciation in the market price of your slice.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#86

Post by panarky »

tikhonj wrote: post #7

A few immediate thoughts: Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large…

It's not about speed for the sake of speed. That speed allows insider trading and frontrunning.

Insider trading means[0]:

  buying or selling a security, in breach of a fiduciary duty or other
  relationship of trust and confidence, while in possession of material,
  nonpublic information about the security.
How do HFT traders get "material nonpublic information"?

  The Wall Street Journal reports that HFT funds buy early access to data
  from third-party distributors—everything from corporate earnings to
  the Philadelphia Fed's manufacturing survey.
If an analyst at the Philly Fed tells me the results of the manufacturing survey two days in advance of its release, and if I profit from that information and give a kickback to the analyst, that would be clearly illegal.

But if the Philly Fed gives the information to Reuters ten minutes early so they can write a story, and if Reuters sells electronic access to HFT traders two seconds before the public can trade on it, how is that different?

And don't get me started about using HFT for frontrunning client orders[1, 2].

[0] https://www.sec.gov/answers/insider.htm

[1] http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charl...

[2] http://www.nanex.net/aqck2/4442.html

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#87

Post by kasey_junk »

I assume folks who advocate for a transaction tax don't actually want less transactions, rather they want more "real" transactions and a less artificially volatile market place.

Unfortunately, a transaction tax would create the exact opposite of that situation. The hypothesis that if there were a transaction tax there would be less transactions is incorrect. What would happen is that transaction quantities would get bigger in order to overcome the new added cost. These larger transactions would magnify the risk at play in the market place. This in turn would raise the reward for being able to pull out of quotes faster and/or to misrepresent the riskiness of your trading strategy.

So a transaction tax would actually incentivize more "false" liquidity and work to the betterment of companies that are more risky.

What HFT systems actually do, is allow firms to "pay" for priority of an order at a price level, by investing in network infrastructure/algorithms. If you want remove that advantage the easiest way would be a system where you transparently pay for priority of an order. The system with the least likely negative side impacts of this would be making arbitrary price level sizes. That is, instead of quoting down only the penny level, let people quote arbitrary (or some fixed but very small) decimals of a penny. That way if you really want to pay up for priority, you can just increment your order slightly and actually pay for the privilege.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#88

Post by a_c_s »

michaelt wrote: post #11
tikhonj wrote: post #7

A few immediate thoughts: Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large…

See, here's the thing I don't understand about liquidity: If it's so valuable for trades to execute in microseconds instead of seconds, and the stock exchanges recognize this value and provide co-location etc to enable it, why are so many stock exchanges closed for half to two thirds of the day? [1] Surely the 15+ hour shut downs are a much bigger limit to liquidity than a few microseconds here and there? There's obv…

Excellent point! Being able to trade on information revealed overnight would have much greater value than being able to trade at an even smaller sub-second interval.

Since the marginal value of additional liquidity decreases rapidly, I've often wondered if having a fixed resolution (say, one trade per minute) would actually be beneficial.

Nobody can realistically trade a stock based on sub-minute changes in information anyway, and having a fixed resolution would eliminate the advantage some players have by having more servers/etc. After all, if we are chasing liquidity, allowing some players in the market to have an advantage restricts the number of players able to participate which lowers liquidity.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#89

Post by yummyfajitas »

williamcotton wrote: post #71
yummyfajitas wrote: post #54

Earlier quoted context omitted.

How would you build a newspaper or magazine without government enforcement of contracts and copyright? If you want to claim an HFT shop is "quasi-governmental" because contracts are enforced, then basically every enterprise in the world is "quasi-governmental" (except for the black market).

First, the NYSE gets way more government support and oversite than The Atlantic. Second, copyright enforcement and free speech have defined limitations for the betterment of society.

I don't follow your comparison. Shouldn't it be Atlantic :: Joe's HFT Shop and NYSE :: Copyright Office? You do know that HFTs don't work for NYSE, right?

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#90

Post by ChristianMarks »

An example of privileged, well-connected parties systematically winning asymmetric zero-sum games against the not so well connected.

I'll believe that HFT adds liquidity to the market when the typical retirement horizon is 15 milliseconds. HFT proponents seem not to (or pretend not to) understand diminishing returns where "adding liquidity to the market" is concerned.

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