>Although the latency competition provides little to no value to the end
>consumers, all HFTs must play the game. If they don’t, a faster HFT
>will beat them to market and their order flow will be reduced.
So yes, it's essentially useless to the retail or wholesale investor.
Actually, worse than useless, since the HFT has a built in advantage that brings no value to the rest of the market. It's an endless zero sum game where other investors (who do the real work) are losing.
>I’d also like to note that I don’t believe automated market making is useless. It isn’t. Providing liquidity and reducing the spread is valuable.
Which HFT is actually pretty poor at. Spreads were reduced significantly by having electronic trading systems (computers are cheaper than manual labor), NOT through high frequency trading systems (did spreads drop significantly in the last 5 years?).
Liquidity was already maxxed out in the equities market before HFT, too. HOUSES are illiquid -- it takes weeks to close on a sale on one of those at best. THAT market could do with additional liquidity. Would be nice to close on a sale in a day, right?
Being able to buy and sell your share a thousand times in a second is not providing useful liquidity to anybody except HFT traders.
At the end of the day they're levying a tax on the rest of the market - i.e. as the OP points out, the market IS rigged.
>In the Hacker News comments on part 1 of this series, there were several comments suggesting that HFT’s somehow steal pennies from ordinary investors. I don’t agree with this claim, but I’m very interested in hearing well reasoned disagreement.
I'd be interested in hearing this well reasoned disagreement with the OP. I'm not so interested in reading the same old tired defenses of HFT, though.
It's not about liquidity or transaction costs. It's about gaining an information advantage similar to what front running or insider trading gets you.
So yes, it's essentially useless to the retail or wholesale investor.
Having liquidity available to take is not useless. You should re-read the article - it is a zero sum game between liquidity sellers, and a positive sum game between liquidity sellers and liquidity consumers.
At the end of the day they're levying a tax on the rest of the market...
It's not a tax. If you choose not to take liquidity you don't pay for it. If you do choose to take liquidity you pay less than you would under other systems (e.g., specialists).
If it's not a tax, then why was the RBC guy able to save millions of dollars by using software to ensure that his orders arrived simultaneously at all the exchanges? If, as related in the 60 Minutes story, institutional investors are each being charged hundreds of millions of dollars per year, how can that be seen as anything other than a tax?
Institutional computer buyers pay hundreds of dollars to Dell for every computer they purchase. Is Dell "taxing" them? Of course not - if they don't want computers they don't need to buy them. If you read the article, you'd realize the RBC guy was buying liquidity. He wants to purchase what HFTs are selling.
There is a simple obvious way for anyone to avoid paying the HFT "tax". Use ALO orders. They come with execution risk, but you don't pay the spread and the matching engine will pay you rebates. Can you tell me why anyone anywhere would choose to purchase from HFTs rather than using ALO orders?
You'll notice that any accurate argument against HFT can be applied to any kind of trading.
There's nothing sinister about HFT except that it's a faster version of ordinary market making. If you think market making is evil, then you'll think HFT is evil. But market making is perfectly healthy, economically speaking. Information advantages and speed have been part of this world in the 400-odd years that centralized trading has been a thing.
HFT is a threat to other market makers, but you're smart enough to know that common people shouldn't be market making and can (provably) only benefit from reduced spreads and increased liquidity. Right?
Nonsense. HFT is a variety of front-running, which is provably only a detriment to "common people", and is illegal in most cases.
They even have an example in the linked article of a trader being forced to pay higher prices for his buy orders due to HFTs front-running his orders; you literally couldn't be bothered to even read the linked story.
...a trader being forced to pay higher prices for his buy orders due to HFTs front-running...
Clearly you didn't understand the article, which was about predatory trading increasing market efficiency. It was not about front running, which is when your broker trades in front of you in violation of his fiduciary duty to act in your best interest. (Note that your competitors do NOT have the duty to act in your best interest.)
Just because the exploit is illegal in one circumstance and not in another doesn't mean it's not an exploit.
When the exchanges are complicit in the deal - being paid for sending information early to particular parties - it's pretty easy to argue there is a conspiracy to defraud the general public, and so regulators have regularly argued:
I don't understand. Using the multicast quote stream (which costs a few thousand/month) is an "exploit"? Or are traders somehow obligated to ignore the actions of other traders? Perhaps anyone using a computer is obligated to act as an agent for people without a computer, rather than a competitor?
I truly don't understand what you are arguing. Could you please explain the mechanics of what you believe should be illegal?
The article you linked calls it insider trading and not front running. In addition, the issue discussed in the article is about making company information public earlier to a select group of people (which is insider trading). However, most HFT (particularly market makers) do no care about this and rely only market data provided directly from the exchanges. This data is provided fairly to everyone.
I previously ignored your comment because in the context of the conversation, it was completely irrelevant. In the comment you replied to, I was asking how one can "cut in front of you". Your comment was just about rapidly trading and rapidly waving one's hands in order to somehow do something evil.
"Use pattern recognition software to outcompete other traders" is not a trading mechanic.
no, the higher price was due to arbitrage and not front-running. Large orders always move the market (this is simple supply/demand economics), HFT makes this move much faster than before. Large orders are usually cut-up in smaller pieces to minimize this price move and get a better price. Katsuyama is just butt hurt that his 1990's trading style doesn't work anymore.
It has absolutely nothing to do with front running. Front running has a very specific definition in market regulation.
Front running refers to a broker placing his orders (i.e. the BROKER'S orders) in front of his customer's orders. This is a violation of fiduciary duty, SEC regulations, FINRA regulations. When the broker gets a customer order, it must be given priority over the broker's proprietary trading. This has been in place for decades, well before trading was electronic.
If an HFT (or any other trader, regardless of speed) places an order into the limit order book of an exchange or other trading venue AHEAD of another customer of that exchange, that is not front-running. That is the normal and correct functioning of the markets, which operate by price-time priority.
tl;dr - trading faster or more frequently than other market participants (who are not your brokerage customers) is not front running.
>Although the latency competition provides little to no value to the end >consumers, all HFTs must play the game. If they don’t, a faster HFT >will beat them to market and their order flow will be reduced.
So yes, it's essentially useless to the retail or wholesale investor.
Actually, worse than useless, since the HFT has a built in advantage that brings no value to the rest of the market. It's an endless zero sum game where other investors (who do the real work) are losing.
>I’d also like to note that I don’t believe automated market making is useless. It isn’t. Providing liquidity and reducing the spread is valuable.
Which HFT is actually pretty poor at. Spreads were reduced significantly by having electronic trading systems (computers are cheaper than manual labor), NOT through high frequency trading systems (did spreads drop significantly in the last 5 years?).
Liquidity was already maxxed out in the equities market before HFT, too. HOUSES are illiquid -- it takes weeks to close on a sale on one of those at best. THAT market could do with additional liquidity. Would be nice to close on a sale in a day, right?
Being able to buy and sell your share a thousand times in a second is not providing useful liquidity to anybody except HFT traders.
At the end of the day they're levying a tax on the rest of the market - i.e. as the OP points out, the market IS rigged.
>In the Hacker News comments on part 1 of this series, there were several comments suggesting that HFT’s somehow steal pennies from ordinary investors. I don’t agree with this claim, but I’m very interested in hearing well reasoned disagreement.
I'd be interested in hearing this well reasoned disagreement with the OP. I'm not so interested in reading the same old tired defenses of HFT, though.
It's not about liquidity or transaction costs. It's about gaining an information advantage similar to what front running or insider trading gets you.