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Why Do High-Frequency Traders Cancel So Many Orders? (bloombergview.com)
206 points by yummyfajitas on Oct 9, 2015 | hide | past | favorite | 236 comments



I think to understand most HFT market makers you have to understand how the markets pay.

Most work on a maker taker model. Which means the trader who initiates the trade pays a small fee and the trader who is the passive side, the one who had their order in the market already, gets paid a small fee. as a side note there are inverted markets but lets leave those aside for now.

This means to get paid you want to be at the top of the book, which means you are the first order to get filled when someone crosses the spread to get their order filled. the way priority is determined is first by price and second by time. So you have a very vested interest in being the first to cancel and move your order to the newest price level.

Exchanges have tried introducing some order types to alleviate this constant send/cancel routine such as the order type "Hide not Slide" but people tend to get upset at these order types.

Once you understand this, you start to realize that almost all HFT firms aren't quote stuffing, they are just jockeying for position at the top of the order book.

I've never really understood quote stuffing, the same firm that quote stuffs still has to deal with those quotes coming back, its not like the market data has a flag saying ignore this quote change as its caused by your own quote stuffing.

The way most markets are setup is that quotes come from gateways and multiple symbols all share a single gateway, usually assigned alphabetically, so A-F tickers all share the same gateway. This means that if someone is actually slowing down market data for say AAPL then they are also slowing down quotes for AMZN as well but again, the same firm that is quote stuffing also has to deal with their own mess so I can't see the benefit.

Another comment complains that HFT firms don't like the fragmented market. That is true to a point, but keep in mind most HFT strategies only work due to the fragmented markets and RegNMS. So while they may not like 11 venues, they certainly want atleast 3 or 4, and many of hte top HFT firms run their own dark pools, adding to the problem:)

As far as Hillary Clinton introducing legislation to curb HFT trading, she was the senator for New York. I'm dubious of her coming down hard on Wall Street.


Hillary will come down on the part of the market that hasn't contributed to her campaigns. Structurally, this means she will make it good for GS who will help write the legislation but bad for anyone else that doesn't belong to the financial hegemony.

Politicians say they're protecting the innocent, but really they're just tipping the scales for whoever is backing them. This is how they do.


Too true... which is why I'm supporting Lawrence Lessig's Democratic bid which is based on fixing this single issue:

https://lessig2016.us/

Might be futile effort though since the DNC isn't even inviting him to the debates despite his having raised 1M in a single month.


What you are describing is not reality.


What do you mean?

GS can already bend the FBI and NY State to their will: https://en.wikipedia.org/wiki/Sergey_Aleynikov


Oddly this reminds me of station trading in Eve Online where users fight over the price of their goods based on mere cents on an ISK.


Ah, yes, good old Jita. In Eve market bots aren't allowed though, they are considered unfair, so there is some difference.


Thank God too since only those with the wherewithal would bother with building trading toons. I did it for fun on the side while I missioned for the bulk of my ISK (boring as hell).


so a game that's more fair than real life. weird....


So you have a very vested interest in being the first to cancel and move your order to the newest price level.

ISTM this would only work in one direction? That is, if you're moving closer to the other side, you can just put in a new order. Cancelling the old one isn't such a priority because no one would pass up the more enticing new price to get to the old price. If they did, free money for you!

If this phenomenon isn't clear from the data, that would argue against the hypothesis that maker-taker accounts for the cancellations.

IANAHFTrader.


You still want to cut your exposure. If you were resting a bid for 100 shares at 99 for 100 shares and an offer for 100 shares at 100, and the market's falling, then sure your highest priority is cancelling your bid at 99 and putting in your new one at 98, as well as putting in your new offer at 99. But you also want to cancel your old offer sharpish, otherwise if the price shoots up to 101 then you'll end up selling 200 shares instead of 100 and exposing yourself to more risk than you intended, potentially exceeding your position limits etc.

Also most of the cost is fixed. If you've already built a super-fast cancelling system that can cancel an order in 8 microseconds, there's no value in running a slower cancelling system in parallel for your less important trades, you'd just run all your cancels through the same system.


Quote stuffing works because you know before hand which orders to filter out and don't need to expend resources considering them while everyone else does. An advanced player can build this into an FPGA to achieve greater performance.


:)

Quote feeds don't work that simply. you still have the following issues:

1) Your quotes are slowed down as the gateway is spammed so legitimate quotes are delayed to you as well as everyone else. So you are still blind as to where the market is just like everyone else.

2) The quote feed doesn't just say, "hey a new order was added and guess what, its yours!!"

You still need to parse the entire message to determine if the order matched one you sent, and even then it won't say its yours, it could be someone else putting in the same 100 share order at the NBBO. I'll admit this can be helped if you have your own number at the exchange to identify the order sender, but then this only applies to exchanges that release that information and even then you still need to parse the order to find out if its yours, so you're basically back to square one.

Now you might say, well then I'll just submit orders far away from the market so that I can more easily identify them as my own, but by doing so you've already outed your self as a quote stuffer and its game over.

It's one thing to rapidly CFO your orders to keep up with the NBBO and changes on other markets, its another to rapidly CFO orders out in the weeds. The latter will get your direct access yanked if abused.

So ignoring your own quote spamming is almost impossible as you still need to assume every order might not be your own.

FPGA's don't help at all here, except to make the parsing faster but they do that regardless of if someone is quote stuffing or not.


Quote stuffing works because you can adjust your trade pressure indicators because you know the quote size and thus fair price is fake. It has nothing to do with overloading systems. To overload competitor systems, you would flicker a 100 share quote on an instrument you don't care about and trade on a different, potentially correlated, instrument.


I am pretty sure if you have the tech to stuff, you have the same tech to see your own stuff coming back in a few ms...


That timeframe is too long (few ms)


Few ms is for the round trip from the exchange which is right in line with what exchanges tend to provide. I have it on good authority that Brian knows what he talks about in that regard...


My understanding was that he was talking about the 'few ms' to parse out whether or not this is you


Parsing is definitely not a few ms. Maybe using Apache and parsing an XML message with a bad XML library it is a few ms... grabbing a message off a Solar Flare card with some good code is a few micros. if you are in hardware on your NIC you can be even faster.

Time from message sent to seeing back on marketdata feed can be a few ms, or it can be faster. Depends on exchange and traffic. Few ms didn't use to be totally uncommon on CME, but it may be closer to 1ms in the 95th percentile these days, for sure.


>This means that if someone is actually slowing down market data for say AAPL then they are also slowing down quotes for AMZN as well but again

Why should one symbol be tied to a completely unrelated symbol? This doesn't engender confidence in the architecture of these markets (which markets are you referring to, specifically)?

>you start to realize that almost all HFT firms aren't quote stuffing, they are just jockeying for position at the top of the order book.

I'm not sure this is an important distinction. What is quote stuffing but position jockeying?


Equity exchanges run the matching engines for a ton of symbols on one core. For example, Arca load balances 3000+ US equities across four cores -- island does it across a 24 core machine, but the outgoing message queue is shared across all 24 cores, so any increase in message rates from one core slows down the outgoing traffic from all matching engines.


Disclaimer: I work in HFT

The article uses the term "front-running" incorrectly. Front-running is where a firm places their own trades ahead of trades they're placing for a client, to capitalize on the price movement that client order might generate. This is illegal.

What the market makers in the article are doing isn't front-running. It's just being smart with their orders.

And that's generally why HFTs cancel orders- they're reacting to market conditions that exist on the span of microseconds and will want to change their market positions very quickly- including canceling orders that they no longer think are suitable.


The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.


Agreed. Matt Levine is one of the few commentators that fully understands market microstructure. The Bloomberg View linked in a different comment (by John Arnold) is horrible with terminology, though.


Doesn't the fact that he understands, and intentionally uses pejorative language make him dishonest?


"Scare quotes ... may be used to imply that a particular expression is not necessarily how the author would have worded a concept."

https://en.wikipedia.org/wiki/Scare_quotes


Scare quotes are also bad composition. Since the author is the author, the author should word concepts correctly and take full responsibility for word choice.


Not only that, scare quotes are often used precisely to misrepresent an idea and then avoid responsibility for it, which seems like a pretty dishonest rhetorical strategy to me.

He's technically "not lying," but many people won't notice the footnote nor appreciate the difference. All they will hear is "front-running == should be illegal"


Ah, I read that but didn't parse it as the author trying to make the distinction between (misnamed) "front-running" and actual front-running.

Probably still worth pointing out, since one of the activities is illegal and harmful (uses non-public information) and the other is just reacting quickly to the public market information.


I subscribe to his column and I've read his criticism of Michael Lewis/IEX, so his snark is obvious to me. But I can see how this article in isolation might not convey that.


Yep. Levine's opinion of using the term "front-running" like that is made more explicit here: http://www.bloombergview.com/articles/2015-07-07/can-you-rea...

Liberately quoted:

'[...] man, remember when "front-running" meant something? [...] But then came "Flash Boys," [...] And now, basically any time anyone trades on public information before someone else, it's "front-running," [...]'


Perhaps it's time to start calling what Michael Lewis mislabels "front-running" as Lewis-running.


I've seen this type of behavior described as "order anticipation", which I think is a much better term. "Front running" means that you are using confidential information that an order will be submitted. "Order anticipation" means that are you using public information and you are anticipating that an order will be submitted.


One of Matt Levine's consistent themes though is that there is often a very fine line between 'just reacting quickly to public market information' and illegal insider activity, so the scare quotes may be intended to imply a degree of 'you decide if you think this is completely above board'.


No, there is rarely a fine line. It's a very obvious line of "are you trading on information on the market". An HFT doesn't even have the ability to front-run unless they are also providing a brokerage service.


It's worth remembering that HFTs like yourself define front-running differently than others.

Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything.

And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.


Well, except in the industry, front-running has a precise regulatory definition.

It doesn't help the conversation to start using the name of a crime to describe something that's legal but you don't like (even if you think it should be illegal, but agree it doesn't fit the legal definition of the named crime).

I don't like that back when rape and pillage on the high seas was a large threat, some copyright holders were able to convince people to start calling copyright infringement "piracy". I don't like our current tendency to over-label things as terrorism or exaggerate the role of narcotics smuggling in financing Islamic terrorism. I also don't like labeling reacting quickly to public information and reacting to expected orders as front-running. I think it's a cheap trick that harms the quality of the dialogue.


I hope you understand that the thievery has been happening for centuries, millennia. There is no other way to gauge real supply and demand than to put buy and sell orders into the market yourself. HFT is doing at ultra-high speed what human market makers do all day long, and have been doing forever.

Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service.

Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause.

But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive).

Without HFT, bid offers would be wider. Fact.


I agree. I've always thought of HFT as a way to let liquidity flow between exchanges, with a payoff equal to the degree to which the inter-exchange spread has been decreased. If the inter-exchange spread is wide, there is some value to be extracted from that spread, and HFT provides the (in my opinion) valuable service of extracting that value, making the market more efficient as a whole. The more people that are competing in that market, the smaller the value the HFTs can extract, until the actual market participants on the exchanges are only paying fractions of a penny for the privilege of buying shares "originating" from another market that has higher liquidity. I can't really see how this could be a bad thing (given enough competition).


Well, here's the NY Fed explaining why they think it's bad:

http://libertystreeteconomics.newyorkfed.org/2015/10/the-liq...


You have summarized it perfectly.


> HFT is fiercely competitive

For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club.

> Without HFT, bid offers would be wider. Fact.

The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact.

The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.


At what point in the history of the public markets in the United States was market-making of any sort not an activity reserved for an incredibly small minority?

The difference, from what I can tell, between the HFT "elite" and the human market-maker "elite" is that the human elite actively colluded to retain their status. Compare the largest HFT firms to the largest investment bank, and the number of entrances and exits in the market for electronic trading firs.


Marketing making != HFT. HFT is simply trading like market makers, they're not making markets.


Can you be more specific about the distinction you're trying to draw here?


Market makers have obligations to maintain a two sided market, in all market conditions.

HFT have no such obligation, and so, when there are rapid shifts in prices, may just wait out the chaos.

HFT gets the benefit of taking the spread, without having to pay the cost of ensuring orderly markets.

http://nysearcarules.nyse.com/pcx/pcxe/pcxe-rules/chp_1_1/ch...


There are market makers, and there are Market Makers. In practice, the registration may simply be a formalization of an existing trading system, or a very light obligation on top of the existing system.

From the document that you listed, it looks like NYSE Arca has a requirement for 100% continuous quoting, but the quotes can be 8% away from the current market price (section 7.23.a.1). This is basically a free pass; nobody wants to trade against a quote that wide. For reference, take the most liquid ETF: SPY trades above $150 and regularly has a $0.02 spread, one THOUSAND times tighter than the 8% requirement.

On other exchanges, there are requirements for tight quotes, but they usually come with relaxed requirements on quoted time. For instance, maybe a market maker could be required to quote "90% of the time within a 0.5% spread". In such a scenario, allowing market makers to pull quotes for 10% of the day is basically giving them a free pass on the most volatile points of a day.

I have seen very few situations where registered/designated Market Makers are obligated to suicide themselves to provide liquidity; there's usually an "out". In practice, the top-tier HFT market makers (de-facto) are already exceeding the obligations required of Market Makers (registered).


Retirement savers are not churning their portfolios and are thus not paying anything to HFT. Not a strong argument.

Making money making markets takes risk capital. i.e. Money. The money makes more money. Fact. I agree. But don't blame HFT. Blame finance. That is how finance works. I see a completely legitimate case for being anti-finance. I don't see a legitimate case for being anti-HFT only. Indeed, the opposite, if HFT reduces the bid/offer paid by the average retail investor. Which it does. Fact.

Do you know who hates HFT even more than the general public? Human market makers. I think that says more than any of my arguments.


Retirement savers are losing a cut of every paycheck to HFT when they go and add to their account. Likely multiple cuts if they've diversified. It's basically a tax you pay for not having the best access to the fastest server closest to the database.


They are not. The largest, best-regarded fund manager in the world (Vanguard) is on the record saying that they've benefited from HFT.


Link?



HFT on average narrows the bid offer. Retail (i.e. small) investors benefit. Human market makers lose out. Without HFT your little old lady retirement angel would be paying much more to a rapacious human market maker.

The point is that it is not the end users who are getting hurt. It's the old monopoly - the human market makers.

DISCLAIMER: I (was) a HUMAN market maker.


It's not a tax, it's the price of immediacy. You can either work your orders yourself (which doesn't in the least require speed), or you can pay a concession. It has always been this way and always will. HFT has made that concession the lowest it has ever been for the vast majority of market participants.


If we're going to arbitrarily redefine terms, why not go with carpet-bagging? Or baby-mulching? Think how many more people would join you in opposition to "baby-mulching HFT".


When Matt Levine includes anything in quotes, assume it's snark. He's written lots about "front-running" being, innaproporatiedy, a catch-all term, much like HFT itself.


I always assumed it was to obfuscate strategies and mess with other HFTs...kind of like in poker you bet based on probability of what the other guy will do, in conjunction with your hand.

Market conditions of real money players don't change in micro-seconds. For some reason this flapping of HFT strategies is a Nash equilibrium among the HFTs.


The SEC has been very recently and selectively cracking down on excessive order cancelling though, so it's not clear that it's not illegal and is "just being smart with their orders".


Exactly. I also wonder if the "canceled" orders are really just changing orders (either "cancel/replace" or "change" messages sent to the exchange) i.e. the desire to buy or sell is still there, just at a different price.


I used to work in it, and this guy's right. The short, layman explanation is: They change their minds very quickly, and very frequently. Hence the H in HFT.


It's a legal distinction. Economically the effect is the same.


How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.


>How could the economic effect be the same?

If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons).

Front running is both a principal/agent problem and a market for lemons problem.


I believe the claim is that David Einhorn, Steve Cohen and other super rich hedge fund managers are providing incredibly valuable information discovery services to the markets. By by forcing them to suffer the price impact of their trades, we then reduce the incentive of such people to provide more information discovery.

tl;dr; Joe 401k should pay more for his retirement savings because by indexing, he's freeloading on the valuable labor provided by prop traders. HFT is bad because it makes this freeloading cheaper.

(Weird to hear argument lionizing hedge fund managers and calling out workers as freeloaders coming from left wing types.)


I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?


The HFT can afford to provide a tight spread to Joe 401k, who typically buys at most 1 lot at a time. He can afford to do this because when there is a large surge of demand, he has the ability to rapidly reprice his orders.

I describe the process in a bit more detail here: https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...

This enables market makers to price discriminate between Joe 401k (who pays less) and David Einhorn (who pays more).


Good question!


Something this article ignores, and which is ignored by most articles on HFT, is that the process is ilegible to the public. "No no we're doing you a favor!" is not reassuring when the activity consumes a bunch of resources on zero sum activity.

Ultimately investing runs on trust. HFT is consuming public trust in the financial system at a prodigious rate. Is it a trillion dollars a year? A billion? Hard to be sure. But it certainly isn't clear the tiny market-making improvements are worth it.


> when the activity consumes a bunch of resources on zero sum activity

The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total.

The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots of zero sum activity.

So instead of decrying the zero sum activity what we want to do is drive down the price of it to the non zero sum participants. And HFT market making has been prodigiously good at that.


Trading is not a zero sum activity, trades happen because each side want what the other person has more than what they have which is a net positive. aka I want lunch more than money.

HFT trading is zero sum because the traders don't actually want or keep stock.


No one wants actual stock. They want to gain money on price differences in stock, or get the dividends that owning stock gives rights to, or I suppose they want to be able to have the voting rights stocks grant.

The difference is all about timing. I may want something else more than you do but am willing to sell now. If at the time you close out your trade (that is sell the shares from me) the price may have risen or fallen. If it rose you won and I lost by not holding longer.

This time mitigation is precisely what market makers have always done and what HFT market makers have driven the profits (and thus the costs to outside participants) out of.


Buying stock is trading future money than money today which is a real and meaningful trade. On the other side, I might want a new car, which means I want money, which means I want to sell stock.

Even stock to stock transitions can be meaningful as Bill Gates had a lot of MS stock and wanted a hedge so he sold stock. What he got was probably worth 'less' the diversification was valuable to him making the transaction a net positive.


What you are talking about are precisely the aggregate benefits to the markets I mentioned, liquidity and easy risk management.

That the markets provide those behaviors is what makes them valuable but the actual trades that make up those aggregates, your selling of shares when you need a car to someone else is zero sum. Either you would make more by holding or you wouldn't.

That something other than that is more important to you indicates that you are in the market for a middle man to bridge that time gap and buy some of the risk from you. Your time horizon is from share purchase to "need money for car", not from share purchase to "optimal selling point". The service you take advantage of when you bridge that gap is provided by the aggregate work of many zero sum interactions between speculative participants like market makers and "investors" like your self.


Continuing from the perspective of buying a car:

If I put a sell order on the market at 12:00 the only impact is the sales price. If it executes at 1PM or 2PM it makes zero difference to me as I can only access money at the end of the day. So, I only gain liquidity if I would have been otherwise unable to sell by the end of the day. Therefore, I don't gain liquidity from HFT.


If you don't want liquidity don't buy it. No one is forcing you.

https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...


> get the dividends that owning stock gives rights to, or I suppose they want to be able to have the voting rights stocks grant.

IE: People want actual stock. The stock has innate value due to the potential for dividends or to influence the future of a company.

That is a significant amount of value.


But people don't care about value per se, they care about the extra value they get (over the price they're paying). Therefore, stock is only valuable inasmuch as what you pay for it is less than the present value of future dividends. Otherwise you're overpaying for it, and you might just as well keep the money.


Grocery store owners don't want vegetables either. They just want to hold them a little while before they sell them to you.

Are they zero sum?


Grocery stores trade low cost bulk purchases for lot's of little transactions. However, stock markets already preform this function.


No, stock markets do not perform the same function as grocery stores. Grocery stores take on inventory risk by purchasing (in bulk) the goods that they think they can sell. If their inventory goes unsold or spoils, they lose. Stock markets provide a _venue_ for trading, but it is the market maker which takes on the inventory risk. An appropriate analogy would be that the grocery store is renting from a separate property owner. The property owner collects rent from the grocery store, just as stock markets collect "rent" (trading fees, colocation fees, system access fees) from market makers. In both cases, the inventory risk is managed by the middleman (grocery store, market maker).


Markets function without a 'market maker'. ex: Berkshire Hathaway Class A.


That's a pretty weird example, because that is the _only_ stock that trades at $200,000/share. Such a high price forces away liquidity intentionally, because the capital requirements of even 1 share are larger than most futures contracts. For most individuals it is more like buying a house than a stock! As a result, there is a NYSE employee (I forget the title, maybe DMM?) on the floor which _manually_ matches buyers against sellers. Other exchanges I believe still match electronically.

Aside from that, how does your statement relate to inventory risk? Market makers and grocery stores take on inventory risk. An absence of market makers in BRK.A* would only show that nobody wants to take on that risk. It does not change the role of the exchange. Exchanges facilitate matches, they are not a counterparty.

* which is not actually true, see http://batstrading.com/bzx/book/BRK.A/ during market hours and you'll find active quotes at a 2% spread.


Yes, and in order the markets to perform this function they needs lots of active participants with differing investing time horizons. Without market makers markets tend to be very inefficient at their job.


Haha! :) Clever point but grocery stores provide utility. HFT is more like if you set out to go buy a whole lot of peppers (because you have a pepper index fund :) and some guy saw you doing this at the first store... knew that was your plan, called all around town placing orders to buy all the other peppers in town and offered to sell them to you for a premium, but cancelled those orders if you declined.


You're confusing the order of operations for this pepper middle man. He can't place an order for peppers contingent on me buying them. He has to buy them or not. Ignoring this key difference fundamentally misrepresents the risk he is taking and the utility (price discovery) he is providing to the market.


It's flawed analogies either way, but a better analogy would be you are a store owner with many branches. The worlds largest pepper buyer walks into your store and buys your entire supply. You call your other branches and tell them to change the price on your own inventory because you are assuming that the worlds largest pepper buyer doesnt need just one stores worth of peppers.


Agree that all the analogies are flawed, although funny. Just as the market made this I'm sure the market will find a solution if it really is a problem.


> The thing to remember about the markets is that each individual trade is always zero sum

That's simply not true; your premise is flawed.


I used zero sum here incorrectly but didn't want to change the comment. It would have been more correct to say that any trade regardless of hold time is any more or less zero sum than any other trade.


>The behaviors that we want in our markets, price discovery, liquidity, easy risk management

None of which we get from HFT.

HFT cannibalizes the research done by value investors (oh, but it's not legally front running if they're not your customer!), rendering that a market for lemons, so there goes price discovery.

HFT floods the market with more liquidity than it needs during normal periods (there is no benefit to you being able to trade at split second intervals. nada. none) and then extracts it all during periods of market distress when liquidity would acually be useful.

And risk management? Please. They're only managing their own risks.


> None of which we get from HFT.

No but we do get it from market makers. HFT has led to a dramatic decrease in the price of market making. Unless your claim is that market making is not something that should be allowed?

> And risk management? Please. They're only managing their own risks.

My point about risk management was about the aggregate benefits of the markets, not about HFT providing someone risk management. If you have some risk that you want to sell, there will be a buyer for it because of the aggregate sum total of all the zero sum transactions available in the markets.


> HFT has led to a dramatic decrease in the price of market making.

How? It seems like this should not be that hard to explain.


> How? It seems like this should not be that hard to explain.

Decreased spreads; trading is much cheaper now than it was before HFT.


> Decreased spreads; trading is much cheaper now than it was before HFT.

By how much? And is HFT the cause or is it merely correlated?


It's directly causal, algo's fighting for better position directly decrease the spread. Competition has the effect of removing unnecessary markup as the next guy who sells just a bit cheaper or offers just a bit more wins until the price is as close as possible to barely profitable. Humans are too slow to play such a tight game, computers aren't.


By a factor of 25, and it's only not more because there's a law against making them any smaller. And it's very much because of computerization; whether you consider it to be HFT is a question of whether you count the early days when computerized firms competed on price or the later ones when the aforementioned law meant they could only compete on latency.

In any case, compete they have, pushing their profits pretty close to zero. Look at the graphs in http://www.zerohedge.com/news/2013-02-13/how-getco-went-hft-... (article is terrible, it was just the easiest place to find the graphs).


Link in the posted article:

http://www.bloombergview.com/articles/2014-03-31/michael-lew....

Quote from the posted article:

" it should be said that market makers have existed in the stock market for a long time and that electronic market makers do the job waaaaaaaaaay cheaper than their human predecessors."


Electronic market makers are a much larger category than HFT.

Microsoft Word is phenomenally heaper than hiring a typewriterist, because it is electronic.


Neither electronic market maker or HFT is a technically defined term, nor is it clear what people mean when they use those terms.

That said, when I was in the industry the common usage of the terms would be that electronic market makers were a subset of HFT.

That is there are HFT strategies that are not market makers, but there are no electronic market makers who are not HFT.


[flagged]


Given that the posted article made that comparison and it matches my experience in the industry it seemed ok to "pretend" that electronic market making was a subset of HFT.

I understand that these terms are used differently by different people, so maybe you can define what you mean to make it more clear what you think the distinctions are.

[edit] You've edited your comment since I replied to call me a shill. Full disclosure, I have worked in HFT and make no secret of it. I do not currently.


Do not accuse people on HN of being shills. And, remain civil.

https://hn.algolia.com/?query=author:dang%20shill&sort=byDat...


>No but we do get it from market makers. HFT has led to a dramatic decrease in the price of market making. Unless your claim is that market making is not something that should be allowed?

No, my claim is that market making was made significantly cheaper by electronic trading in the 90s-00s but HFT had very little effect on that.

HFTs do a lot of market making, make almost no profit from it and mainly use it as cover for their more nefarious activities.

>My point about risk management was about the aggregate benefits of the markets, not about HFT providing someone risk management

Great. So even you agree that if we banned HFT we'd be no worse off.


You are ignoring the context of the article in order to push an ideological point.

Levine is explaining how you can get a 95+% cancellation rate simply by running the most brain-dead simple possible market maker strategy: because you're required to post orders at multiple exchanges, and because every price change involves order cancellations (potentially lots of order cancellations, even on a single exchange, because of pairs trading and price ladders), and because adjusting prices on exchanges in near-real-time is the basic job of a market maker, virtually anyone running an electronic market maker is going to have a huge cancellation rate.

Levine brings this up to illustrate the silliness of proposals to regulate HFT by targeting entities with huge cancellation rates.

Comes now 'cdroconnor. You're playing a semantic game. You're defining "HFT" as "bad HFT", and everything else as simple "electronic trading". FINE. Nobody disagrees with you, except on the very boring point of what labels to attach to things.

But your argument here doesn't make any sense for the thread, because the good simple electronic trading you're condoning is also targeted by the cancellation regulation Clinton proposed. Which is the whole point of the article.


>You are ignoring the context of the article

The discussion went off course way before I dived in.

>Comes now 'cdroconnor. You're playing a semantic game. You're defining "HFT" as "bad HFT", and everything else as simple "electronic trading". FINE. Nobody disagrees with you, except on the very boring point of what labels to attach to things.

There is a very substantial non-semantic difference between robot-executed sub-millisecond trades (HFT) and trades which are are just executed electronically.

In every discussion about HFT the probability of someone falsely attributing the decreased transaction costs of "not shouting in a pit" to algorithms that execute sub-millisecond transactions approaches 1.

>But your argument here doesn't make any sense for the thread, because the good simple electronic trading you're condoning is also targeted by the cancellation regulation Clinton proposed

I'm no particular fan of that either. I'd prefer Italian style micro-transaction tax. That wipes out nearly all of the sub-millisecond trading and leaves the rest intact, including market making.


You've made it very clear how important it is to you that we call benign electronic trading --- and, I infer, electronic market making --- something other than "HFT".

What you haven't made clear is why you believe you're actually arguing with anyone here. I am 100% certain, because I've had the conversation with him multiple times, that 'kasey_junk agrees with you that there is such a thing as malignant electronic trading.

Exactly what is the controversy here? The people who are talking about HFT reducing spreads are talking about benign electronic trading, and none of them appear to be denying that there are other kinds of electronic trading.


>What you haven't made clear is why you believe you're actually arguing with anyone here. I am 100% certain, because I've had the conversation with him multiple times, that 'kasey_junk agrees with you that there is such a thing as malignant electronic trading.

I was arguing that sub-second algorithmic trading cannot be credited with substantially reducing spreads in the early 00s.

kasey_junk linked to an article that claimed that.

It's a defense of HFT that's rolled out so often that it's practically become a cliche.


Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares?


I think the illegibility of it is important if it is affecting other people's finances.


Nearly every good or service that you purchase is backed by a nearly illegible process of global trade. That doesn't affect your finances?


Doesn't it? The illegibility of offshore money affecting overall tax take and therefore government spending, services, and jobs? The illegibility of jobs disappearing to ... somewhere? Not knowing if you've bought products that have been manufactured by slave labour or just awful working conditions?

It's not clear.


>Nearly every good or service that you purchase is backed by a nearly illegible process of global trade. That doesn't affect your finances?

Yes it has, but why would you consider that a good thing? CAFTA and NAFTA have been pretty horrendous for the finances of Americans and TTIP and TPP are likely to be even worse.

They can't be killed unless enough people understand them, either.


No-one is being made worse-off by HFT except professional market-makers (who are being outcompeted) and perhaps professional buy-side traders (whose secrets leak out faster), both of whose job it is to understand the market. If you're a nonprofessional you should be investing with Vanguard or the like, and you benefit from HFT. If a layman with no expertise tries day-trading they're going to lose their money either way; we do have "must have this much money to be allowed to trade" laws, but those are controversial too for obvious reasons.


There's a pretty strong chance that your retirement funds are not being cannibalized by Samsung or Apple.

Whereas, with HFT...


If you pay $100 extra once in your life for the gold iPhone, then Apple has probably cannibalized more of your retirement fund than HFT.

Ballpark esitmate: drop $20k/year into retirement (1 lot of SPY/year) x 1 penny/share being robbed from you x 50 year working career, you've lost $50 to the evil HFTs.


True, more than the money it's the problem that all these super talented people are trying to relive Superman 3 instead of curing cancer.


Have you found the cure for cancer and now you're wasting time while waiting for the FDA to approve it?


TABB group estimated HFT income to be $21 billion in 2009. That's about $65 for every man, woman and child in the US.

Ballpark figure, of course.


Not quite, that's a theoretical upper bound - it's spread x share volume. Compare that to Apple's actual profit last year of $39B.

https://finance.yahoo.com/q/is?s=AAPL+Income+Statement&annua...


Losses due to burglary, by contrast, are around $5 billion a year. For comparison.

Which is probably more relevant than AAPL's net profit.


HFT has DRAMATICALLY reduced trading costs which has improved the value of my retirement fund.


Electronic trading decreased them. HFT increased trading costs. This is why dark pools are now a thing.


Try trading in a market with low liquidity and no HFT. It's a nightmare.

Anyhow, HFT affects execution, 'electronic trading' affects how you put in orders, both make the process of buying/selling securities cheaper.


>Try trading in a market with low liquidity and no HFT. It's a nightmare.

Such markets are created specifically for the purpose of avoiding HFT: https://en.wikipedia.org/wiki/Dark_liquidity

HFT hasn't been around that long, either. Before 2005 it basically didn't exist.


Read your link. Dark pools are created so institutions can trade large blocks without moving the price, or to hide transactions.

Dark pools are beneficial to institutions in some circumstances, not to individuals.

And yes HFT hasn't always existed, once upon a time you'd have a pit of screaming traders and brokers, and for an individual to buy/sell stocks you'd have to call your broker on the phone, who'd charge you an obscene amount for the privilege.

Anyhow, HFT is more or less just a euphemism for high-speed arbitrage/market making.

I look at the execution I get on my trades today, I couldn't imagine not having that service available.


>Read your link. Dark pools are created so institutions can trade large blocks without moving the price, or to hide transactions

Yes, to hide them from HFT.

Read on a little.


Yes and the bit about 'predatory HFT' is backed up with an article which has no information about what constitutes 'predatory HFT', it merely repeats the words in a small annotion. The article is more about the regulatory concerns over dark pools.

I'll tell you why they use dark pools. On the open market, if you sell lots of shares, buyers will see that, and drop their bids. Likewise if you put in a large bid, sellers will raise their asks. In a dark pool, institutions can move large blocks at a given price without market forces interfering, and reduce trading costs.


If that were so, dark pools would have been around for as long as we've had public exchanges. Yet they only appeared on the scene after HFT did.


I'm confused. Dark pools (ie, private exchanges) are devices used primarily by giant investment banks and hedge funds to try to load or unload large amounts of stock without moving the market.

What point are you trying to make about them? That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.


Dark pools exist largely to prevent HFT from parasitically extracting value from large trades. Spearing whales I believe it's called. Giant investment banks, hedge funds, insurance companies and pension funds use them.

>That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.

Dark pools are an evolved defense against parasitic market players that is not cheap. These costs are then passed on to you via your pension fund, index fund or if you buy insurance.

I don't see how that's an argument for them unless you or your friends were personally profiting from it.


Large trades should move the market!

You and I buy stocks in small amounts. Intuitively, after each of our trades, we understand that the market moves to take the impact of those trades into account. That's the point of markets!

So why on earth should it be that a hedge fund should be able to buy or sell huge amounts of stock without having the market move? You don't have that power. Why do they? The fact that a giant entity is trying to move huge amounts of stock is information. The point of the market is to capture that information and build it into prices. That's exactly what HFTs are doing in this scenario.

The expectation that hedge fund managers have that they should be able to capture the spot price of a security and then buy or sell arbitrary amounts at that price, taking their information advantage out of the hides of every other market participant, seems totally unfair. Again: you don't have that privilege on the market. Why do they?


Private trades have existed forever. Dark pools as infrastructure in their current form, of course rely on computers.

It's like the difference between searching for a house on a public database, or a broker's private database...


So electronic trading is what? Slow computers? And HFT is faster ones?


>So electronic trading is what?

That great innovation where you no longer have to shout in a pit to get your trade executed because, you know, computers.

Virtually all trading these days is electronic.

>And HFT is

Algorithmic trading by computers that's "fast" (usually regarded as sub-second trading, although definitions vary a little).

The more you know...


You keep saying "shout in a pit" as if that was the primary benefit of electronic trading. But of course, that's not the primary benefit. The major benefit is that with humans out of the loop, it's harder to grift huge amounts of money from people trying to do simple trades.

For instance: Google [odd eighths scandal].

And that's a modern example of humans rigging the markets, exploiting lack of competition and automation. Things get much worse the further back you go in time.


The primary benefit was that it decreased transaction costs which is the reason spreads went down in the late 90s/early 00s when humans were still in the loop.

Humans are of course perfectly capable of rigging the market with or without computers, a fact so mind-blowingly obvious, I'm not sure why you'd accuse someone of believing that it's false.

This particular thread was not about market rigging, it was about whether HFT can really be credited with decreasing spreads in the early 00s.


The computers that replaced the shouting in ball pits make trades algorithmically and do it in under a second.

You have not described a difference between two things that you are trying to distinguish between.


Even if we all accept that HFTs are 'stealing' fractions of a penny per trade, just how often do you trade your retirement funds?


Much more often than you might think. Every time we make a deposit (likely monthly/bi/weekly) that money needs to be deployed (aka stock purchased). If we are part of a big fund that fund may need to buy stocks in huge chunks and when the HFT sniffs out what they are buying they will raise the price.


The price has to go up anyway, that's what happens when demand increases, it's nothing to do with HFT. Large block trades like this will often be arrange over the counter (OTC) or on dark pools, so the fund purchasing the shares will get a fixed price and it's up to the market maker to deal with the execution risk in the open market.

Edit: As Harryh said, large mutual fund managers believe that HFT allows them to get better prices for their customers: http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...


Vanguard (the manager of the world's biggest funds) has consistently stated that HFT market making has lowered their trading costs and increased returns for investors.


Usually it's done on your behalf by institutional investors. The costs will be passed on to you in the form of less money once you retire.


> Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares?

That's not true, not like HFT anyway.

First, you can quickly and succinctly describe the traits and benefits of a smartphone. You can be high-level at first, you don't have to explain how every detail works. There's no question, for example, that a touch screen doesn't actually work as advertised. You can just say that a smartphone is a cellular/wireless computer device with a usefully large touch-screen display.

In contrast, the unknown question with High-Frequency Trading is: is it actually providing value to anyone but the traders themselves? They might say they are "market-making" but are they really market-making (a trading role with proven market value) or are they merely exploiting structural inefficiencies in the trading infrastructure that mostly hurt everybody else? Maybe they are, but they should be able to describe it in a high level terms first (market-making, liquidity, etc.) where their role provides an obvious benefit to the market, and if you don't understand the high-level terms (eg liquidity) you can look them up.

So far as I can tell (and I am willing to be proved wrong here) there is no consensus answer to the question of whether HFT is actually valuable to markets.


I can quickly and succinctly describe the traits and benefits of HFT:

Replacing slow expensive humans with fast and cheap computers has dramatically reduced the cost of trading. You can see this because buy/sell spreads have shrunk by at least 10x.


That's not what High-Frequency Trading means. The terms for what what you describe are the more general "electronic trading" and "automated trading". They enable HFT, but are not HFT.

High-Frequency Trading, while also an umbrella term, virtually always refers to a subset of algorithmic trading involving arbitrage over extremely short timeframes. HFT is not about being faster than "slow expensive humans" it's about being microseconds faster than other HFTs.


I believe that you are making a distinction without a difference. Operating over extremely short timeframes is what allows electronic traders to provide such efficient pricing.


The distinction I am making means everything. It enables "Latency Arbitrage." It allows HF traders to see trades that are about to happen before they actually happen and cut in front if it'll be profitable.

http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-...


That blog post does not accurately represent how markets work. It is not possible to see trades that are about to happen that have not happened yet just by being faster. You can react to past trades faster than someone else. But no matter how fast you react, it doesn't mean you can see the future.


We're getting off track. The point is that the value of HFT is disputed. You claimed HFT reduced buy/sell spreads by a factor of 10, which is obviously false once one distinguishes HFT and Electronic Trading in general. If you're unwilling to do anything but deny the difference between HFT and Electronic Trading there's no point in having a discussion about HFT's benefits.


For the record, I think the vast majority of people's arguments about HFT are simply about the definitions of what HFT is. It isn't clearly defined anywhere and the blog post you linked earlier certainly doesn't capture any definition I've seen used in the industry.

In my experience though, electronic market making, which I regard as a very good thing, is a direct subset of HFT. To do it properly you must be fully automated, fast, across venue and trade alot. By nearly every definition I've seen that makes you HFT.


No one (including you) has presented any meaningful distinction between HFT and Electronic Trading in general.


> HFT is not about being faster than "slow expensive humans" it's about being microseconds faster than other HFTs.

Now, HFTs are competing with other HFTs, but initially, they were competing with "slow expensive humans". The current situation only tells you how far we've progressed.


Please please please keep the phrase 'zero sum' out of this. It'll only encourage pointless arguing about whether or not something is zero sum.

It does not matter if trading is/isn't zero sum. Or perhaps you can explain why it matters?


Its a pivotal issue. Zero sum means no value is being added by the process - its entropic. Such processes can be dispensed with, to the benefit of all.


You're missing the point, It doesn't mean that at all. Plenty of things could be dispensed with for the benefit of all, zero-sum or not. ZS is not a magic flag that shows something is worthless.


Disagree; it is exactly that flag. Other things may be even worse than zero, of course.


People seem to think that 'zero-sum' is an analytic shortcut to declaring something good/bad. You can't actually do this, however neat it seems. You have to consider all the difficult-to-quantify social impacts and intricacies too.

Almost every attempt to declare something zero sum will miss out relations, factors, dependencies and links because the model they pick is too simple. Hence the never-ending arguments about trying to define something ZS or not.


That I can agree with wholeheartedly.

But I'd add, HFT is like kids playing soccer on the freeway. They don't create value for anybody but themselves, and they screw up things for everybody else. I wish they would go away.


You are right. I shouldn't have used that term when responding to the original poster.


This article brings up something that HF traders have been bemoaning for a long time: the fragmented US market structure. In US equities, you need to monitor almost a dozen exchanges to be competitive. The popular book "Flash Boys" gave the impression that HF traders loved this market structure and used it to extract more money out of the market. In the majority of cases, this is wrong.

In fact, the fragmented market results in huge costs (4 datacenters worth of infrastructure, low latency connectivity, etc) In reality, most market makers would vastly prefer to simplify this away. This is one of the reasons many traders have moved to alternative markets that have fewer trading venues (for example, many futures and options trade primarily on a single venue)


Bare in mind that the system used to be centralized and, as mentioned in the article, was much costlier [0]. The fragmentation has downsides and no one likes redundancies, but it is a direct response to the older, less competitive system. The fact that a decentralized system is better is exhibited in the lower price and the participation in the smaller exchanges.

[0] http://www.bloombergview.com/articles/2014-03-31/michael-lew...


Completely agree - in the single exchange markets you see a lot of monopolistic behavior with the operators.

In this current, though, we have three major operators with 2-3 exchanges each - many with single digit percentages of market share. I suspect that the savings in execution cost due to competition are vastly overwhelmed by the increased cost of infrastructure for most market participants (excluding the largest firms).


The HFT guys love the fragmentation. If not they wouldn't be building out private microwave links between Chicago and NY to "beat the market".


The NY/Chicago arb trade is futures vs equities. In other words it's two separate products with highly correlated prices. On one side are the futures contracts and on the other side are the underlying stocks (and ETFs). As long as the two separate products exist, you'll always have fast arbitrageurs. This is true whether the matching engines are 1000 miles apart or in the same rack.


That makes no sense. Here let me rephrase it:

"Americans love commuting. If not, they wouldn't be spending millions of hours in their cars each year to get to work!


I'm sure they'd rather not be paying for microwave links, but they have to because everyone else is doing it. End result: everyone wastes lots of money to get no additional benefit.


Fragmented exchanges are better for everyone except for high frequency traders. Then they actually have to do low latency arbitration to make money instead of full on front running like they do now.

Arbitration between physical locations is something that can't be helped. The other things ways that high frequency traders make money can be helped by better systems, but there are no incentives to make those systems when exchanges make so much of their money from high frequency traders themselves.


> Fragmented exchanges are better for everyone except for high frequency traders. Then they actually have to do low latency arbitration to make money instead of full on front running like they do now.

This is a very strong statement with little support. I agree that some competition among exchange operators is important, but how do you justify exchanges like CHX, with approximately 1% market share?

I am not sure how to respond to your comment regarding front running without more detail. Many sources have already debunked the Michael-Lewis-style argument regarding front running. Where do you see front running? (Using the proper definition of trading ahead of a customer order based on knowledge of that order)


> how do you justify exchanges like CHX, with approximately 1% market share?

What needs to be justified? It is competition and decentralization.


Some HFT strategies depend on fragmented exchanges. Look up "latency arbitrage" for examples.


Yes that is one way they make money but not the only way and not even the most effective way since they are splitting their profits with anyone that can compete with them and there is only so much to be made.

The fact that there are multiple issues with high frequency trading is one of the reasons it ends up being so polarizing. It ends up being an ambiguous term that sometimes means something that is a natural result of decentralization, and sometime means techniques that would be grating to most people's common sense of what should be legal.


John Arnold (former Enron energy trader) also posted something on Bloomberg View, and the main gist of the article was:

Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT’s front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread.

http://www.bloombergview.com/articles/2015-01-23/high-freque...


I can't believe the article in the comment above made it on to Bloomberg View. It uses a completely incorrect definition of front-running - claiming it is a "loose" term. It isn't. Front running is illegal. It requires advanced knowledge of a customer order (as the definition linked from the article states!) That means seeing the order before it appears on a market data feed. "Gleaning" information about the order using publicly available information is not front-running. That is reacting to the market.

This abuse of the term completely confuses the entire debate.


I understand your concern and do appreciate your point, but can you elaborate on why you think the definition is so black and white? Simple illegality oftentimes makes wrongdoing less clear, for example with insider trading.


That's why most of these HFT-sponsored exchanges (read: BATS, CHX, etc) pay retail brokers (e.g. eTrade, Scottrade, etc.) for their flow.


I would be interested in your source for that comment, as I think it is untrue (at least for US exchanges, I don't know rules in other countries).

I am not saying payment-for-order-flow doesn't exist, but the buyers are firms like Citadel and other "internalizers", not exchanges.

If by "paying" you are referring to the maker/taker rebate model, that is paid to any market participant, not just retail brokers.



And these exchanges have historically been doing it. BATS has been around for about 10 years. But the initial players like Island ECN, Archipelago, and others (now merged into NSQD, NYSE, etc.) have been paying retail brokers for their flow since late 90s. This is what attracts big fishes to trade at their venues.

When you do the wrong over several times without getting caught it becomes a standard (read: make-or-take rebates)


Which is why retail level commissions have dropped to zero (or close to it).


I happen to have 144 lines of Ruby which implement the world's most braindead market making algorithm, coded by someone who had literally never written a trading system before. It cancels ~98% of orders before they are hit when running on a single stock on a single venue.


Is it profitable? Or just paper trading/simulated? Braindead stuff works if it is the fastest in the world, but as you slow down you need to get smarter to cover losses due to getting "picked off" more frequently.


I'm pretty sure it's a competitor for Patrick's StarFighter game. It's not supposed to be impossible to beat.


The "new" part of this news, which not many have responded to here, is the notion of an HFT tax. The arguments on either side of HFT (liquidity/spread/etc. vs. cost/unfairness/etc.) have been largely unchanged for the last few years. There simply isn't enough data made public to declare a victor.

As far as the tax: personally I'm very in favor of slowing down trading... unfortunately, what's being proposed introduces as much structural game theory as it eliminates. What's the dominant strategy for a trader faced with a rule like "any trades resting for less than 300 micros get taxed"? To be as fast as possible without triggering the tax; staying just above the threshold.

All that economic waste on low-latency tech will just be redirected to low-jitter tech. Those who can reliably land an order within +1 microsecond of the tax line will outperform those who only have an accuracy of +10.

I'd like to see more exchanges experimenting with things like random variance in speed bump size, frequent batch auctions, etc.


> personally I'm very in favor of slowing down trading...

As a retail trader, no.

As an example, yesterday I placed a sell order on $90,000HK worth of a stock. Once I hit 'send', my order was fulfilled before my browser could load the confirmation page, and at the market price I was quoted seconds before.

This is, in large part, thanks to market makers who use HFT. Before this, the broker/market maker might take a spread worth half a percent or more (and being a retail investor, you probably wouldn't get the 'market' price), now it's pennies or less, and at the market price.

Thanks to HFT, spreads are smaller, execution quicker, and it definitely 'levels' the playing field.


I completely agree that liquidity is first and foremost, and that in today's market structure HFT drives a lot of it. Retail enjoys a lot of the benefit, because trades in the $1,000s - $100,000s range probably aren't enough to slip the market. But is ultra-low-latency the ONLY way to bring about that liquidity? I have yet to come across any economic or technical reason why that has to be the case.

Also, slowing down trading doesn't mean eliminating HFT, it's a matter of what constitutes "high" frequency... I'd argue we're well past the point where incremental increases in speed result in equal gains in liquidity. And those increments now cost more than ever before.


When incremental gains are no longer worthwhile, institutions will no longer invest in the infrastructure. As long as the profit gained > costs, they will invest in infrastructure, to the benefit of the tech industry.

And you're right, we don't need market makers trading as fast or as frequently as they do, but they see an opportunity, so they go for it, and we benefit anyway.

I'd personally be happy with 10 second execution, but if I can get 1/2 second execution, why would I complain?


HFT exists because low latency trading exists. Not the other way around.

>it definitely 'levels' the playing field.

Have you read Michael Lewis's Flash Boys? Because HFT demonstrably doesn't level the playing field.


Levels the playing field for retail investors.

If your entire strategy is arbitrage, then of course you're going to lose out to someone who is quicker and has better technology. Of course some people who lost out on 'low hanging fruit' are going to be mad someone else bought a bigger ladder.

But if your strategy is anything else (investing or any type of speculative trading) then HFT benefits you.

I've traded on markets with low liquidity and no HFT, and high liquidity with HFT. I don't miss the low-liquidity markets, waiting half a day to see your order executed only to see the price move against you because no one could match your order, meanwhile institutional traders are trading the same stock outside the exchange is the worst kind of infuriating.

The argument against HFT is like saying that bank tellers who exchange currency for a 2% spread are cheating out back-alley money changers who take a 20% spread... Yes someone is losing, but it's not necessarily a bad thing.


There is enough data to declare that a transaction tax is a loser. Canada tried it. The bid/ask spread rose 9%. This resulted in a transfer of wealth from retail investors to institutional ones.

http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...


Or you could just get rid of the sub-penny rule and let HFT compete on price.


> the story of high-frequency trading is basically one of small smart firms undercutting big banks by being smarter and more automated and more efficient

Is that true? Isn't there a high barrier of entry? I was under the impression that large trading firms were building high-speed connections, which is obviously not something a small firm could ever do.


These days you can rent a co-located computer with direct connection to the exchange. The cost is a few grands per month. Not very cheap but definitely within reach of a small business. There are many small HF firms based all over the country that just rent 1 or 2 computers close to exchanges. This is bad for big investment banks like Goldman because they no longer have a location advantage - you do not need an office in Manhattan to compete with big guys anymore.


Then my followup question would be: why do we actually need trading to be faster than the regular internet allows? For the objects being traded (companies) have time-constants that are far greater than the millisecond-range. And I hope the answer is not "because everybody else does it" :)


The answer is, in fact, "because everybody else does it".

https://www.chrisstucchio.com/blog/2012/hft_apology2.html

This can be partially fixed with a very technocratic market microstructure change (eliminating the subpenny rule). But politically that's very much a "huh?" point - imagine Bernie Sanders saying "I believe we should let traders quote in increments of 1/100 of a cent, not 1 cent".

https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...

(This would fix things on the placing orders side, but not on the cancelling orders side.)


Eliminating the sub-penny rule would probably be counter-productive for most US equities. You would not see further spread compression (most stocks' natural spreads are already greater than one cent), and displayed size would likely shrink (this latter bit is exactly what happened when prices decimalized). A better alternative would be a tick-size schedule that's a function of price, as is generally done in Japan and Europe.


The "displayed size" would probably shrink, but so what? You'd just need to look at the book to see it.

Decimalization would help even with equities where the natural size > 1c. HFTs who want to get to the top of the book could compete by offering $10.0073 instead of racing to be the fastest at $10.0100. HFTs would compete on price rather than speed.


A more granular tick doesn't just "spread out" the existing liquidity to a bunch of price levels--it meaningfully decreases incentives to post serious size. The spread will end up being marginally tighter, but with thinner books, you still pay more to trade large amounts. The objective function to minimize is transaction costs, not spread.


> it meaningfully decreases incentives to post serious size

Do you have support for that claim?

(I don't have an opinion; Trying to form one based on data)


The second page contains a succinct summary of theoretical reasons why this is true. The rest of the paper goes over empirical findings: http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/G2%20D...

Since then, we have additional data points from the decimalized US equity markets. See http://www.sec.gov/rules/other/2014/34-72460.pdf for a bibliography. The weight of the evidence points towards thinner books. Incidentally, the SEC is looking to increase the tick size for illiquid small-cap stocks for this very reason.


Thanks!


Because the issue isn't how long it takes for a company to do something. The issue is how fast you can react once information about what they are doing becomes public.


Do you know of any of these companies? I would like to reach out.


I doubt you will get much of a response from _any_ proprietary trading company. The industry is aware of its public image, and any conversation comes with the perceived risk that you are a journalist looking to write a hit-piece.


Startup costs are a few thousand a month. The firm I worked at has never had more than 3 people and was started by one nerd working out of his flat. You can spend a lot more if you want to do proper latency arb rather than price improvements, but bootstrapping your way to that point is hardly impossible.

I run algo strategies myself - not HFT - and my monthly trading costs are less than my monthly beer costs. Capital invested is perhaps 1-2 years savings for any software engineer (e.g., my best recent trade was dropping $40k on SPY when it was at $190, it's now at $201.66).


Good question. HFT is a spectrum. At the lowest latency (approximately 5 microseconds), the barriers to entry are massive - multi-million dollar startup costs.

For "kind of fast" - 10-100 microseconds - there are a variety of brokerages that can get you started with costs of approximately $1000-10,000 a month. This is rapidly changing though - the exchanges have been continuously increasing the prices of their market data to the point where consuming the entire US equity market proprietary feeds costs around $50,000/mo in licensing.


It's not an especially high barrier if your strategy doesn't require you to build physical infrastructure (most strategies don't require this). You have programmers, hardware, colocation costs, direct exchange connection costs, trading fees, etc. The programmers are by far the most expensive component.


"Updating" orders seems a far more accurate terminology than "cancelling" in the market maker case.

Although of course making such a distinction by law is problematic, because updating an order to be "out-of-the-money" (have an absurdly low or high price) is almost equivalent to canceling, and objectively determining if an order is "out-of-the-money" is problematic.


"Here you have an industry that has undercut the business of the big banks, irritated hedge fund managers and been great for small investors. Why would cracking down on that business be populist? Why would it alienate wealthy donors?"

For the same reason that people don't generally cheer when a gang war happens. Just because the gangsters are mainly shooting other gangsters doesn't mean the violence isn't costly to society. The same with Wall Street. Just because people don't trust big banks and suspect them of rooking the common man doesn't mean that they want to legitimize said rooking, or that it isn't costly to society when banks rip each other off.


I think you are missing his point. HFT is not typically banks ripping each other off. Its a new outside entity that has made the service the banks and traditional market makers provided to their customers much cheaper at the expense of hedge funds and bank profits.

In most industries we applaud this disruption.


But, in the mind of the populist masses that Mr Levine it criticizing it is. I don't work in finance and I'm not going to make any judgments on the industry, just to say that people who are opposed to it would be opposed to HFTs as well.

Also, the people who applaud 'disruption' are not this sort of populist, they don't cheer because of the damage done to incumbents but because the disruption will hopefully mean better products/services/prices for customers. HFT just does the job of the old investment bankers slightly more efficiently. If you think investment bankers are bad, you're not going to think that more efficient investment are an improvement.


When ignorant people don't like something we should strive to explain the benefits more clearly. Not give up and declare that thing bad just based on a vote.


Viciously competing to provide services at the lowest possible cost to the customer is not the same thing as ripping each other off.

There is no violence here. Only competition.


Ahem, buried in the middle of the article (I wonder why) "Navinder Sarao is accused of spoofing in the S&P 500 futures market, entering and cancelling lots of orders to create an illusion of demand, in suspicious proximity to the flash crash of 2010."

This happens a lot more than you might think. There is always a temptation to stuff the order book to keep it going in a direction profitable for you (ie, fake volatility).

This is the #1 reason why canceled ordered from HFT are suspect. It's too easy to stuff the order book and cheat a little. You really need highly credible market makers who have proven not to do this sort of thing. Even then, such folks are very rare and hard to appreciate. Your algorithms get so complex and obfuscated it's hard to tell what's stuffing the order book and what's simple market making.

The fact is, everyone is stuffing the order book. Sarao is more a patsy than anything else. His biggest crime wasn't belonging to a Goldman Sachs paying bribes to political entities.


There is always a temptation to stuff the order book to keep it going in a direction profitable for you (ie, fake volatility).

Is this something you have personal experience in? I ask because a lot of people relate this concern because they read about it in Zero Hedge, which is regarded by people in the industry as (as someone here once put it) "a conspiracy theory site without the theories".


The description of ZeroHedge is funny and not entirely untrue, but if you regard them as an aggregator of opinions, (which they mostly are, even though they do offer their own opinions), it is unmatched in its breadth of coverage, despite having a rather low signal coverage.

WRT suffing the order book - at least as far back as 2003, in Eurex, there was a swiss trader who would do that in bond futures. There were a lot of comlpaints, and even death threats IIRC, but a Eurex investigation at the time found he did nothing wrong - their main finding was that he would occasionally get those "stuffing" orders executed, which means that (as far as they are concerned) they are not false or misleading in any way.

That's probably the gist of it: as long as you are willing to take the hit if your bluff goes against you, there's nothing "fake" about it. It's been years since, and I know not of any (officially investigated) cases back then, or of any recent cases - but I'd be surprised if it's not very prevalent. (Also, I've been out of the HFT world for a while).


It takes about five minutes on any broker that shows the full book to see orders vanish outside the market as it moves. Obviously you haven't bothered to do that before commenting. If those orders were real and not just fake demand they won't vanish so consistently.

Here's a good article for you to read: http://www.bloombergview.com/articles/2014-10-02/prosecutors...

There's a reason why they made spoofing illegal. The problem is, that you can't tell the difference between spoofing and just market making, especially as the algos get particularly complex. And when you start looking at in aggregate you see the real problem.


A better question is why do we even have 'High Frequency Traders'?

Wouldn't the market be better served by a window structure with a scale on a more human timespan? Say a 5 min process in which:

* for 4 min orders are taken in confidential secret.

* there is a 1 min blackout window in which no orders are taken, and in which any results of settling the outcome of orders is not published.

* At the end of that period the new results are published. (It doesn't matter who reacts first, it's who reacts best.)

The profit between what sellers are asking for and what the buyers are willing to pay still needs to be accounted for. This could be the market's operating fee (the cost of the sale's commission), it could be attributed to the government as a form of sales tax, it could be returned in some way to the parties involved (buyers pay less, sellers earn more), other, or some combination of the above.


The price of equities is not known. The market is how that price is calculated.

You could slow down the process, but that adds risk (that one party is getting the wrong price). The market makers would say, I'll sell you one 1 share for $1, 10 shares for $1.20, 100 shares for $2, 1000 shares for $10. So then someone who wants to buy 1000 shares for $1 a share will buy only 1 share at $1. Then in the quiet period, the market makers will adjust their prices. 1 share for $1.01, etc. Then you'll sell another share for $1.01. Then you'll wait 5 minutes, and the market makers will adjust their price.

The market is going to work the same way at 5 minute delay as it works at nanosecond delay, but just be slower. The market makers won't be getting you a better price, and your large transaction won't not affect the share price.


> A better question is why do we even have 'High Frequency Traders'?

High Frequency Traders (HFT) do a lot of positive things for a market - mainly providing liquidity where they might otherwise not be. They also act as a sort-of balancing force for undervalued or overvalued stocks (in the volume the HFT's trade with over time), "normalizing" the VWAP and TWAP (among other health indicators) for a given ticker.

In other words, markets want (and benefit from) HFT's.


Would you, as an investor, rather trade on exchange A, where there is a given spread and market depth, so you know approximately what price your order will execute at in the next few seconds, or at exchange B, where the most recent price and depth is up to 5 minutes old, and where your orders will be executed at an unknown price sometime in the next 5 minutes?


I guess I see why high frequency trades are necessary in the current trading framework, but looking at the situation from a high level, isn't it obvious that the resources being spent on microsecond level response improvements don't benefit anyone but the winners? Can someone argue otherwise?


It's the opposite. The resources being spent on microsecond speed race is a form of a tax imposed on HFT by society. If all big HFT firms spent on getting faster, they don't benefit in expectation, since all the competitors will be equally fast, but society benefits because that spending goes to wider economy outside HFT


Right, that's the obvious situation that I see. I'm wondering if anyone can argue otherwise?

If not, why isn't there a bigger push for market infrastructure that doesn't advantage high frequency trades?

I don't know that most high frequency microtrades are a real problem either way, since it seems mostly zero sum among the people playing that game. But whenever there is a macro change in a price that takes place over a tiny time scale, it seems that we shouldn't be advantaging speed in getting there first.


"If not, why isn't there a bigger push for market infrastructure that doesn't advantage high frequency trades?" because most of those who could do the pushing are ignorant and/or confused about the economics of competitive markets and how competition benefits society as a whole and not really those who are competing


You're right, although you should also build into that argument the benefits that accrue to technologists that work at HFT firms, and to technology vendors who sell to them.


And to HFT simulation writers!


Well, fuck.


So how would you fix it if you were in charge?


TL;DR: Market makers put a buy and a sell offer, separated by one or more cents, on every trade; when someone big enough picks one side, they cancel the other side and re-issue new buy and sell offers with new goal-posts.


it's called "discovery" ...


It's great to see Matt Levine on HN - for those interested in finance, his Money Stuff [0] daily column is absolutely excellent. His writing has a really fantastic funny and informal style.

He does a great job presenting a fair and deep view of a lot of finance issues, like HFT or Unicorn valuations.

[0] http://www.bloombergview.com/topics/money-stuff


Matt is brilliant. A little bit more mature and reserved than during his time at Dealbreaker, but still awesome.


I agree. His Bloomberg articles have been regularly rising to the HN front page in the last months. When I follow the link and see his avatar, I take the time to read the article.


what benefit does high frequency traders provide to rest of society? none. they raise the cost of transactions of all investors. it should be banned and those brought to justice.


Legalized quote stuffing.


[deleted]


Read the article.


Because they're gaming the market. How it works: place a large order, wait for others to make a bid, then cancel the order and sell your own at a mark-up.




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