To illustrate with arbitrary numbers, if HFT’s currently focus on 50% strategy (i.e., price competition and liquidity improvements) and 50% latency, a more optimal scenario would be 50% fewer HFT’s focusing 100% of their efforts on strategy.
A High Frequency Trader's Apology, Pt 2
201–210 of 242 posts
Re: A High Frequency Trader's Apology, Pt 2
#202Earlier quoted context omitted.
Exactly. Even more direct benefit to retail investors - low liquidity costs mean that we can invest in mutual funds and especially ETFs that have extremely low fees. Those funds have to shuffle around their holdings as investors come and go, and they'd have to charge a lot more if they were paying $0.10 to cross the spread.
The ETF concept could be interesting to look at. I was reading Tryenor's book and I thought he mentioned how entering an ETF position still nets out below an index return because of the cost of liquidity. I wonder if ETFs would have ever grown as large as they had if HFT never existed (the time periods of the rise of ETF parallels to the rise of HFT.) Anybody have any insight here?
The success of ETFs is probably significantly underwritten by the increased liquidity. As a rule of thumb liquidity makes markets less volatile and thus able to sustain more complex structures.
ETFs control tracking error, how closely the ETF follows the index to which it is benchmarked, by letting authorised participants (APs) arbitrage the ETF against the underlying. For example, if you are a SPY AP, you can turn in a certain quantity, called the creation unit, of S&P 500 constituent stocks and "create" the correct number of ETF units. Alternatively, you could surrender a creation unit of SPYs and the ETF trust would "destroy" those ETF units and issue you the S&P 500 constituent stocks [1].
The risk for APs increases non-linearly vis-a-vis the liquidity of the underlying. This has been empirically witnessed as a "U-shaped relationship between fund premium and market liquidity, which suggests that more active trading does lead to lower mispricing but only after a certain level of liquidity is reached" [2].
[1] http://www.londonstockexchange.com/traders-and-brokers/secur...
[2] http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0416.2008....
Re: A High Frequency Trader's Apology, Pt 2
#203Earlier quoted context omitted.
You're not saying it simply. You're using the word "liquidity" as if it's an abstraction. The equivalent term is "cost of trading". When you replace the word "liquidity" with "cost of trading", your assertion stops making sense; it becomes "trading is cheap enough already". Huh?
I have no opinion on whether more liquidity and "lowering the cost of trading" is a net good or bad. On the one hand it means less profit for market makers and a slightly lower price to buy stocks. On the other it means more volatility when algorithms mess up. HFT doesn't matter at all to long and medium term investors that actually provide the value in the stock market(which is providing capital to help grow compani…
Long and Medium term investors should be investing broadly across the entire market.
Just a decade ago you needed to buy into a mutual fund and pay sales loads and expense ratios over 1%.
Now, you can own an ETF containing a piece of each of the Fortune 500 companies for an expense ratio Medium term and long term investors love HFT because it saves them 0.9% in yearly expenses. If you've got 100k invested in SPY instead of some Fidelity fund, HFT is saving you $900 a year.
Re: A High Frequency Trader's Apology, Pt 2
#204Earlier quoted context omitted.
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 Ra…
Actually, out of the three links the first one does not talk about HFT at all, but about algorithmic trading. I don't think anybody seriously thinks algorithmic trading is bad per se. The third link talks about reducing the bid/ask spread. Fair enough. However, what people seem to forget in these discussions is that if you are genuinely trading in the long run, then the bid/ask spread is mostly irrelevant anyway, bec…
That's a familiar pattern: disingenuously link to studies that don't validate an assertion.
Re: A High Frequency Trader's Apology, Pt 2
#205I don't have any more or less dislike for HFT over more traditional trading. My biggest problem with finance is the brain drain it creates, in HFT's case a lot of great maths and computer science people get sucked into the finance black hole which saddens me greatly. Certainly having liquidity in the market is important but what level of liquidity is enough and beyond that no more value is provided to society and so the brain drain in fact holds back society?
Re: A High Frequency Trader's Apology, Pt 2
#206This is a great series so far, but I think some people are taking it too seriously. This is roughly the equivalent of giving you a good tutorial about how a short map-reduce implementation works and then asking you to agree that Hadoop is awesome. It may or may not be, but the toy example isn't sufficient to make the determination. It's just background information for the uninitiated.
Some relevant questions that are completely glossed over:
1. What compels an HFT to actually trade? Is there anything forcing them to keep supplying liquidity even if the market's moving against them? How is an HFT different than an actual market maker?
2. How does an HFT decide that it has a better-than-even shot at turning a profit on a trade? Most of the objections to HFTs revolve around the answers to this question (i.e. pseudo-front-running by trying to detect large buys/sells that get split over lots of orders) and their implications (i.e. 'real' investors leaving the exchanges).
3. The "market-maker strategy" HFTs you describe are indisputably compensated for providing liquidity and taking on risk, but is the return on HFTs actually equivalent to the return on other investments with equivalent risk? If not, and they earn a premium, why isn't that evidence that something's broken?
Re: A High Frequency Trader's Apology, Pt 2
#207Earlier quoted context omitted.
You don't seem to provide any evidence of this claim.
Indeed - the author seems to confuse trade volume with liquidity.
The author gave you the benefit of the doubt by not spelling out the essential relation between liquidity and volume over time. Just what exactly do you think liquidity is, if it has nothing to do with volume over time?
Re: A High Frequency Trader's Apology, Pt 2
#208Liquidity has gone down with the advent of HFT: http://opusminimax.wordpress.com/2012/04/20/ardent-support-f...
You don't seem to provide any evidence of this claim.
Re: A High Frequency Trader's Apology, Pt 2
#209Earlier quoted context omitted.
I get that $0.10/share is significant, or I wouldn't have bothered posting. Why be annoyed at a process that isn't costing anyone anything significant? I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it -- and if the only value they're adding is reducing the time that a trade takes place by minutes or seconds, then I still submit…
> I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it Either this logic, that profit is evidence of value destruction, is flawed or capitalism doesn't work. You assume that the capital markets are a zero sum game. But by promoting liquidity HFTs make the markets (a) more attractive to play in, and, (b) cheaper for companies to fina…
>Either this logic, that profit is evidence of value destruction, is flawed or capitalism doesn't work.
Strawman. That's not at all what I said.
In this particular case the only time the market really benefits is when the HFT isn't making money. And I didn't say that "because he's making money it's evidence of value destruction." Just that the only example OP was able to point out that was an advantage to the consumer was when the HFT was losing money.
Re: A High Frequency Trader's Apology, Pt 2
#210Earlier quoted context omitted.
I get that $0.10/share is significant, or I wouldn't have bothered posting. Why be annoyed at a process that isn't costing anyone anything significant? I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it -- and if the only value they're adding is reducing the time that a trade takes place by minutes or seconds, then I still submit…
When speculators (HFTs) trade they either move prices in the right direction or they make a mistake and move prices in the wrong direction. When they move prices in the right direction, they provide a valuable price setting service to the market, and when that happens they also make a profit, in effect the market pays them for this service. When they move prices in the wrong direction they lose money, and they pay th…
>they provide a valuable price setting service to the market
[Citation Needed]
My thesis above is that there IS no value added. You're saying that they are being paid for value provided, but other than possibly causing the price to be updated more quickly (on the 100 millisecond scale mostly, but possibly as much as a few minutes sooner), I don't see how that provides any real value. And honestly I don't see how even helping the prices move a few minutes sooner adds any value.
In ALL the examples in the OA, if there were no HFTs and you simply WAITED a few minutes, then the people actually making trades would end up with better deals. Sure the market wouldn't be as volatile and instantaneous, but in what tangible way is that a bad thing?
So, again, how does moving prices a few seconds sooner provide value? The examples given all assume the market would be completely static without HFTs, which is obviously bogus. HFTs are only interested in stocks with minimum levels of volume, meaning there would likely already be a lot of liquidity, and they won't touch stocks with too little volume, where they'd actually be useful (OP or another HFT, correct me if I'm wrong).
I think extraordinary claims require extraordinary proof. It certainly seems to me and a lot of other people like they're stealing money from valid transactions by taking advantage of a corner case in the system; claiming that "price setting" adds value when in the very examples given they don't seem to add any net value (except when the HFTs are doing it wrong and losing money!) seems like an extraordinary claim. So where's the proof that the market wouldn't actually be better off without them?