A much more entertaining and informative book than it's title or pedigree would hint at. Genuinely recommended reading.
One of the most surprising details in the whole book was the trading system devised by the biggest HFT-complainer, "Thor". And not even the system itself. Trading firms have to connect to practically all the exchanges, because they need the ability to send in orders directly to one of them. In trading, adverse selection is a thing - if an institutional trader sends in a big order, liquidity providers (HFT firms) can get hammered pretty badly. So when someone is buying or selling in one exchange, the HFT shops will adjust (read: pull) their quotes on other exchanges before the same executions would hit them there as well.
The basic assumption of a liquidity provider can be summed up as: if someone is executing trades, they must know something more; the prices currently on offer are clearly wrong. Pull quotes before things get expensive.
Thor wasn't exactly an optimisation engine, it was more a synchronisation engine. It kept track of transmission latencies across all the exchanges and could coordinate order creation times to such a degree that the orders that it wanted executed would land in all the exchanges at almost exactly the same time. This would allow it to execute its orders on all the exchanges at the prices available at that very time, without giving HFT firms the time to communicate across exchanges to pull their quotes. If I remember correctly, even the book used the term "slam" for the behaviour.
Thor used a strategy that any half-decent engineer should come up with in less than 5 minutes. But it was considered unfair by all the other market participants. The book didn't tell much more about Thor, other than that its use was discontinued shortly afterwards.
As someone who enjoys a lot of Michael Lewis's books, I completely agree. The arguments and explanations throughout make no sense, because it's a lot motivated reasoning trying to justify a false narrative.
It all made perfect sense to me. I'm not sure why people get so upset about it.
I suspect people can't tell the difference between the arbitrage that will happen no matter what (Chicago to New York, etc.) with the front running that came from seeing orders too large for one exchange and buying the rest from the other exchanges so they could sell it to the original buyer.
I mean that part is true and is exactly how markets are supposed to work, but the conclusions he draws are just bizarre. He makes the argument that HFT is the classic story of the fat cats stealing even more money from the little guys. But it couldn't be further from the truth. HFT's are helping the retail investors and actually "stealing" from the "fat cats" (institutional investors). Retail trading is now cheaper (free in a lot of cases), easier, and faster today than it has ever been, largely due to HFT firms and low-latency liquidity providing strategies. Also the ETF revolution and the massive democratization of financial asset classes and strategies is entirely predicated on HFT arbitrageurs.
But Lewis realized that the idea of HFT actually helping the little guys and hurting the big guys wouldn't be as sensationalist and provocative a story, so he decided to twist the facts to suit his own narrative.
Trading is cheap now... because it's all been computerised. The exchanges are digital - as soon as you can do all the transaction processing by computers there is an entire army of (expensive) clerks that can be laid off who used to handle the paper work. HFTs occupy a niche where they can exploit latency between exchanges for profit, with occasional other activities that were considered to be far more questionable when it was people playing those games, not algorithms.
>Trading is cheap now... because it's all been computerised.
This is true but the (fairly recent) move to essentially free trading for retail investors exists because firms will pay money to brokerages like Robinhood just to get the opportunity to trade with a pool of traders that are unsophisticated.
Paying for order flow doesn't fleece customers. Those customers are guaranteed to trade at the best price by NBBO.
So why would people pay for order flow? The people who do this are liquidity providers. What they want to do is sit there and buy a stock for $10 and sell it for $10.01 all day long. If they are buying and selling to you or me that is a great deal.
But what happens when BIG HEDGE FUND buys a shit ton of stock for $10. BIG HEDGE FUND probable knows the price is wrong at which the liquidity provider will sell a bunch of stock for 10.01 but then instead of being able to buy it for $10, all of a sudden has to buy it for higher. This is how liquidity providers can lose some of their profits.
So they pay brockerages like Robinhood that don't have big hedge funds as customers, not to fleece those customers but just to sell liquidity to them without worrying about getting picked off.
Just because things are computerized doesn't mean firms are willing to provide liquidity. The number of natural counter-parties at any one time are low, this is where HFT comes in, as market makers. Also if you look at the pricing mechanism of ETFs, they simply couldn't exist without HFT. Arbitrage is essential to ETFs, they simply wouldn't exist without low latency creation and destruction of shares.
Wait so you're saying that trade sniping is good for more than just the handful doing it because side effects? I've heard this pro-HFT argument before and always assumed it was biased BS.
I don’t. As someone in the industry, almost nothing in that book is actually correct. Moreover, HFT is a very small part of the industry and is not particularly profitable.
Quantitative investing as a whole is becoming more and more popular, while HFT isn’t.
Another factual observation is to look at Virtu's recent earnings numbers. They're basically pivoting as hard as they can to get out of speed-based HFT and into execution services, because the profitability of the former is cratering.
