All of you HFT programmers almost had me with the "we minimize the spread" arguments. But a $0.01 spread x 1000 transactions per second is still $10/sec while a $10 spread on a transaction that happens once a day is a hell of a lot less.
I think you're confused by what "spread" means. It doesn't mean that for every transaction, we're getting a cut of investor money. Think of it this way.
Say MSFT bid is $99.50 and ask is $100.50. That means you can sell for $99.50 and buy for $100.50. What market makers do is tighten that spread so it becomes $99.75 and $100.25, for example. Now in the first situation, if you wanted to buy 100 shares you would have paid $100.50 per share + broker fees. Let's say broker fees are zero. You just paid $10050. In the second case, you would have paid $10025, saving you 25 dollars. Note that broker fees are the same in both cases.
In reality, the MSFT spread is much tighter thanks to fast market makers, so you would probably pay $100.02 per share, so you would actually save closer to $50 on that transaction. Intense competition among different market makers makes it so that every stock has as tight a spread as possible. Think of any business that's competing with price -- offer products at too high a price and your competition will sell for less, adding value to investors and taking profits for themselves.
I read somewhere that before the great recession, there was a year when the financial sector was 40% of GDP. One way or another, you're skimming a huge and undeserved (as the great recession proves beyond a shadow of a doubt) amount of money off the top.
The keys is to the lies you tell yourself is this:
That finance in general has such a large percentage of GDP is unfortunate. But you're getting off-topic. If you're attacking the entire financial industry, I have no responses for you. Banks, hedge funds, etc. etc. I don't associate myself with all of them. My main point is that high-frequency trading is a technology, and it can be used for good and bad. Example of a good is tighter spreads, which I explained above.
> Trading is a zero-sum game.
Zero-sum games don't, by definition, contribute to the greater good, and no civilized person would ever play one for any serious stakes. If you do, you've either got a gambling problem or you've figured out your opponent's tell and you've unscrupulous enough to use that knowledge to take advantage of him.
Trading should NOT be a zero sum game. It should involve 4 parties: sellers, buyers, workers and consumers. Sellers are people who need cash to buy something else, like a house or retirement. Buyers are people who have more money than then need to spend right now. Workers are people who produce goods and services for wages. Consumers are the people who benefit from what's produced. That's not a zero sum game. In that game, everyone is a winner. It's honest, hard-working people who produce, consume, save and invest to benefit both themselves and their neighbors.
As stated earlier (see the post about wheat and bread), no one in the non-zero-sum economy needs anything traded at the ms or ns level. Once an hour or even once a day is more than frequent enough. And if that means liquidity goes down, that's fine. The only one who needs that much liquidity are the gamblers.
I should have been clearer. By zero-sum, I didn't mean that someone always gets screwed. I meant that someone always loses money, someone always wins money. But they can both win at life. You are very familiar with this. You buy food. You lose money. But you gain calories. The store earns money. Both players win, but the sum of money exchanged is zero sum. That is what I meant. If you actually read beyond my comment to the lines below, you would have understood it as such.
The concept is not so esoteric as you make it out to be. In every trade, someone loses money and someone makes money. However, th
You are correct. If Waddell was the proverbial straw that broke the camel's back, the trading that occurred afterwards was the pack of hyenas feeding on the camel. The flash crash would not have happened without Waddell, but without the rabid selling afterwards, the flash crash would probably have been more of a flash blip. So you do have a point.
However, my point still stands. HFT is just a style of trading, not a strategy. You didn't need to be HFT to short sell E-minis that day. You didn't need to be HFT to be Waddell. You didn't need to be HFT to manipulate price action and take advantage of the panic. Any click trader who recognized the plunge would have sufficed. Those who sold the market did so because they were opportunistic traders, not because they were HFT.
The purpose of my post was that with new technology comes responsibility, and the quicker we realize that HFT is just another piece of technology, the faster we'll get to regulating it properly.
The fast market makers buy and sell lemonades at $1.00 and $1.01 respectively what banks are buying and selling for $0.10 and $5.00. Our customers are everyone that trades with us. We tighten spreads and save institutions millions in execution costs.
You're trying to paint every person working in finance with the "evil brush". There's more to it than that. You're frustrated with the collapsing housing market. Frustrated with corrupt corporations. Not every financial firm is Enron. Keep that in mind.
For every trade, there is a buyer and seller. Buyer makes X, the seller loses X (barring fees). The sum of values exchanged is zero.
The reason why the stock market exists is that it's not zero-sum utility. Like insurance, some people are willing to lose money in order to hedge out a risk or move risk to different products. Nonetheless, trading is absolutely zero-sum.
You're not barred from purchasing machines that are close to the exchanges. Contact your local exchange liaison and he'd be happy to set it up for you.
Is it an "unfair practice" if it's openly available to anyone who's willing to pay? Is it cheating if the CVS store closer to you gets more business than the Walgreens farther from you?
There are many actual instances where trading firms DO cheat. Educate yourself and you'll have much better arguments. Flash orders, for example. But co-location is not.
I have no idea what kind of conspiracy theories you're talking about. Are you complaining about the rampant speculation and panic in many markets? I don't see how that's related to HFT. I'm not defending speculation, nor am I defending market manipulation.
Most firms do not have enough capital to unilaterally push the market in one way or another. If the market's behaving erratically, it's usually because of the majority of players thinking in a certain way. If the value of the dollar falls, everything will rise in price, especially commodities.
You're confusing flash orders, which is indeed illegal -- they allow firms to get a peek at customer orders before the orders hit public exchanges.
But being fast as a competitive advantage, given that everyone receives the same information -- that's something entirely different. By the same argument you're making, Google should be fined because they have infrastructure that's vastly superior to the average person. If the average person wanted to compete with Google, he or she would need to build too many things.
I'm being a bit facetious, obviously, but you have to distinguish these concepts.
You bring up the valid points I was trying to get at. People should recognize HFT for what it is -- just a technique. A way to do something. Not a strategy. People used to deliver mail with cars. Now people use planes as well. The fundamental value-add is the same; the way in which it's being done is different.
You have strong feelings against the financial industry in general. I understand. Enron screwed over thousands of people with their shady tactics and outright manipulation of their finances. Banks used their position and superior knowledge of the markets to sell unsafe products recklessly and brought down the housing market. Unlawful HFT firms started using flash orders to their advantage, peeking at client flow before the information hit the public exchanges.
At the end of the day, every for-profit business is trying to make money. So don't pretend that we are alone in that respect. The only difference is that as consumers, you don't really understand the value of a few pennies being saved over billions of transactions. We may be saving the US economy, in aggregate, millions and millions. For any one person individually, it will be insignificant.
You have it backwards... shorter hold times = smaller risk. Longer hold times = larger risk. Do a thought experiment with a random walk. For any given period of time, there is a measure of expected move (0) and variance. If you hold positions longer, you're more likely to suffer more swings.
Your confusion arises from the fact that there are two problematic things here: market failures and HFT evils. Yes, HFT evils do exist. Flash orders are evil. They allow HFT firms to take a peek at orders before they hit the public exchanges. They should be eliminated. Step ups in options are not fair for similar reasons. They should be eliminated.
But something like the flash crash on May 6 was largely due to market failures. Someone bet that the US economy was going to collapse -- to the tune of $4.1 billion dollars. Some exchanges, for some reason, started quoting products at 1 cent. These failures contributed to the massive market swing.
Market making HFT is a continuation of... designated market makers back in the day. People would manually be assigned the task to provide liquidity for certain companies. Again, not all HFT is good. I'm sure there's HFT firms preying on unfair data and naive customers. But let's not throw the baby out with the bath water.
E-mail is used for the so-called "Nigerian" scams. Guns are used to murder people. Technological progress doesn't wait. The most annoying thing about this whole debate is how people are unaware of the bigger issues at hand. Monopolies in the currency exchanges forcing spreads that are 5% the price of the product. Consumers unknowingly buying illiquid, unregulated derivatives that banks charge exorbitant fees for, only to have those derivatives blow up and destroy the entire market.
I don't know why you're so opposed to the idea that there are things machines can do better than humans. Perhaps you can enlighten me on where you are coming from? Your arguments seem to belie a deep-seated dislike for everything HFT.
Anyway, being faster is tangentially helpful to consumers, in the sense that we're competing against each other for market flow. Pepsi and Coca-Cola probably worry about producing 12328 bottles per assembly line per day. Who cares if they produce 12328 or 12329? As a consumer, you just want your bottles. In market making, being faster allows us to manage risk better. We stand publicly so that investors can trade against us. Sometimes, someone will put in a massive order (probably some pension fund) and we will all get huge positions that we need to liquidate quickly. The fund gets a cheap price for all its shares, and we have the difficult task of liquidating it as quickly as possible. That's where our speed comes in. It may not benefit consumers directly, but because we can manage risk better, the spreads are thinner, thicker, and pension funds that manage your 401k can get more volume done at once.
I do agree that the arms race is unfortunate. Many in the HFT community wish the arms race to stop. If you think about it, the only people who benefit from this arms race is the arms producers: the companies that dig holes into the Earth to create a network line faster than any existing line. In order to simply stay in business, HFT companies have to fork up some dough for those lines. Trust me, we hate what this arms race has begun.
Also, please try to separate "market failures" and "HFT evils". The flash crash was caused by faulty technology and an irresponsible trader, NOT HFTs. The exchanges were quoting some products at 1 cent... Waddell bet $4.1 billion dollars that the US economy was going to tank... All of these events added to the events. With technology comes trouble. When cars were first introduced, everyone got worried about safety. Do people still die from cars? Yes, it is very unfortunate. But progress is not going to wait.
If you got this far, I commend you for having the patience to read an opposing viewpoint.
Discrete auctions could work. I can't think of any a priori reason why periodic auctions wouldn't work. They might even make the market place more efficient.
However, if you're willing to listen, I'm inclined to disagree.
First, investors get utility out of a continuous market. It's like having a convenience store open continuously from 8:30AM to 4:00PM, not in periodic intervals.
Second, that system still favors super-speed traders. Think about it. People will submit their quotes, but the market won't match them until after a period of time. That means the last entrant has the most advantage. As a result, you'll still want the fastest programs, best connections, the best programmers, etc. Even if you make everything hidden until the match (as in a dark pool) you can still process worldly information and wait till the last microsecond.
Third, that system will widen the spread, the difference between the lowest ask price and the highest bid price. Think about it. Let me stretch out the time so that it makes more sense in an everyday context. Imagine you're doing a lemonade stand business. You buy from suppliers, sell to consumers. If you were forced to only buy and sell once a month, instead of every day, what kind of limitations would you face? You would probably be extremely wary of overstocking, because the oranges might go bad (do they? let's just say they do for now). You could probably get away with charging more per drink because people know it happens so rarely. As a result, the costs of having to deal with the increased risk of holding the unsold oranges for longer are passed to the consumer.
There are dark pools, which you can read about. In such exchanges, all quotes are private from all participants. Only the machines see the quotes and generate matches. Obviously, you can probably back out information by analyzing your own trades, but because a lot of information is hidden, many institutions prefer to do volume on dark pools. However, as much as dark pools solve issues, they are somewhat bad for the market as well, because a lot of trading is done secretly. Average investors like yourself -- or anyone, for that matter -- has no visibility into the quotes -- the price discovery -- that are being generated.
There are different flavors of exchanges, all trying to solve the problem of risk transfer. You're not alone in advocating auctions. But it might not have the intended effect.
The implied accusations are flying out of the page like daggers. I wish you, Slashdot readers, could see the world through my eyes. As techno-savvy as you are, you somehow love to hate on HFT without having any idea what it is. Don't get me wrong -- I really don't care if you hate it. What bothers me is that haters have NO IDEA what HFT is doing and basically project their hatred for finance onto it.
I have to say, this article is pretty level-headed. I was expecting more baseless accusations. Of course, the article throws around the typical "HFT was blamed for the huge drop in the stock market in May 2010..." If you cared to look at the linked WSJ article, you would have read that Waddell's desk had sold 75,000 E-mini contracts at the start of the flash crash. If you cared to look at the CFTC report that officially investigated the flash crash on May 6th, you would have read that CFTC blames the flash crash on some trader who executed a large sell order worth $4.1 billion dollars -- why, isn't that just about 75,000 E-minis?
You would have also read that HFT firms actually mitigated Waddell's mistake. They were there to absorb the thousands of E-minis and so dramatically lessened the initial impact. It's really quite admirable the amount of precision coders needed to invoke in order to create a system that executes so quickly and at scale during such a turbulent period. I was hoping that the discourse here would be more along those lines.
Unfortunately, the amount of volume that Waddell executed was too much risk for the traders to bear, so they started getting out of their positions. In fact, no one could handle a trade of such size. It was as if someone predicted the collapse of the US economy and bet $4.1 billion on it. The ensuing chaos was purely the after-effects of the initial destruction caused by Waddell.
New technologies can be used for bad. I bet there's plenty of bad traders manipulating the markets and using speed as an unfair advantage. We need to police HFT, for sure. But I'm also sure that people are using guns to kill other people out of malice, using cars to traffick illegal drugs, and using airplanes to destroy buildings. HFT is a style of trading. It's a technique, not a strategy. The sooner we realize this, the more progress we will make as a society in implementing policies and regulations.
You guys all hate on HFT, but you are really the ones benefitting from this technology. In market making there's a spread -- the difference between the lowest ask price and the highest bid price. Take a look at the most liquid stocks. They are probably trading at 1 cent wide spreads. Compare that to years ago when spreads used to be dollars. Go to a bank and look at the currency exchange rates. I just did a look into Bank of America's spreads. 100 euros gets you 135.35 dollars. Based on recent trading prices on the public exchanges, 100 euros should be able to fetch closer to 143.62 dollars. BoA is charging a spread that is more that 5% of the value of the product! I don't blame them -- the landscape in the currency markets discourages technological innovation and competition.
This phenomenon isn't true just for currencies. It's true for most products that are not regulated or traded publicly. You, the average investor, are being ripped off dearly investing into these opaque markets. The size of spreads is truly a symbol of capitalism. If there's competition, the spreads are tight. If there's monopoly, the spreads are wide.
You complain about HFT being super fast and "shaving off transactions" as if we somehow have access to your accounts and embezzle money a la Office Space. That's like complaining about WalMart having such efficient systems and internal logistics that your cereal is getting too cheap. Yes, I do believe that some traders use speed unfairly, and yes, WalMart probably did shady things we don't know about, but my point is that not every trader is bad. Technology
The article is misleading. Please don't go around saying "AI beats top progamers at Starcraft".
For one, the player they mention, Oriol, was not a progamer. The article does not say so either, but articles quoting the article seem to.
They say
Oriol is very good—one-time World Cyber Games competitor, number 1 in Spain, top 16 in Europe
There seems to be confusion about the name of the player. The player that the UCSC article refers to, =DoGo=, indeed participated in WCG 2001 finals for Spain, but his name was Antonio Crespo Gomez.
Who knows what the context really was? Maybe the developers asked him to try a specific build order in order to see how the computer would respond. Maybe he did legitimately lose one game... out of a hundred, the only reason being he was forced to only use his mouse.
In any case, the biggest complaint I have is that he was a good player back in 2001. That was before the invention of mutalisk micro, the macro-oriented plays led by iloveoov, the micro-oriented strategies pursued by Boxer -- basically, before people figured out how to really play the game. The AI researchers undoubtedly utilized a lot of modern strategies. Also, no matter how good someone used to be, it's hard to be as good ten years down the line, even with crammed practice. I'd bet anyone that no computer in the next couple decades would beat actual progamers of today (by which I mean an A-team member of a progaming team in Korea, in a best-of-five).
Don't take this post as bashing the research -- I think it's amazing what they've been able to do. Just don't compare it to Deep Blue vs. Kasparov, because it's closer to Deep Blue vs. Middle School Chess Team Captain.
What I meant was that a lot of continuous market making is managing fleeting imbalances of supply and demand that do not really reflect the stock's fundamental value. As a result, specialists really are not helped by fundamental analysis. They're just hoping to win cents here and there, and that's their edge.
You make good points. Market makers were providing plenty of liquidity before. However, I challenge you to find data suggesting that the bid-ask spread has, in general, gotten worse because of computerized market making. We should not discourage firms from providing the fairest price for investors, i.e. provide the tightest spread. These firms are competing for investor business, and that's how spreads get tightened (if you're not at the inside, you don't get the trade).
The spreads for the most liquid symbols are now at their minimum tick sizes, one cent. You can't improve on that, it's not mathematically possible. The argument can be made though, that the minimum tick size should be less than one cent. On stocks like Citigroup, it would probably save investors a lot. That's more of a regulatory issue though.
I don't disagree that market makers / specialists always existed. In fact, I emphatically agree! HFT market making (note that I'm not including predatory HFT algos) is basically that -- computerized market making.
Also, to your last comment -- why wouldn't you want market makers to get as close to the market as possible? That's a good thing! It's like Staples upgrading their technology to provide you with paper for cheaper. It's a win-win scenario.
Instead of paying $25 for MS because the spread was $20-$25, the fastest market making firm now provides it for $23.35-$23.36, so you get your fill at $23.36. I'd say that's good for investors, isn't it? In the end, that's really the goal of all market makers -- to make the tightest spreads possible.
First of all, thank you for taking the time to explain your position.
What does it mean to "make markets"? Stock markets have been around for a hundred years without high frequency trading, and they worked just fine.
Exactly. They worked fine because market makers have been around for hundreds of years. High frequency market makers are just that... computerized market making.
Think of it this way. Let's say you want to make a trade. Buy 100 shares of Google. What would you do? You would probably call up your broker and ask him to buy your shares. The next part is what investors don't see, which is why the concept of market making is usually missed.
The basic idea is... who is going to trade against you? If you're buying 100 shares, that means someone needs to sell 100 shares. What if no one is willing to sell 100 shares?
Then you have to wait. Maybe you can wait a few minutes. Maybe an hour. If the stock is illiquid, you might have to wait many hours. If the stock is rallying, no one might want to sell to you for a long time.
That's where market makers come in. They don't own any of the stock, but they're willing to take the other side of your trade. As I mentioned, market makers make a continuous market possible. They're standing there ready to take either side of a trade. That allows you to think of a trade you want, enter it, and get it executed at a good price within the second.
Why do we need middlemen to quickly buy and sell stocks? They only are willing to do so if they can make money.
All businesses are willing to stay in business if they can make money. Doesn't mean they're not also providing a valuable service.
So if I put out a sell order and want to sell my stocks for at least $5, and there is a HFT firm in the market that buys my stock for $5 one hundredth of a second later, then a few seconds later my stock is sold to Bob for $5.02, then I am loosing out on 2 cents. To me, this has *negative* value.
"I want to sell for at least $5." What you're saying here is basically, "Give me the best price you can sell for, and sell it there." You're completely welcome to put in a limit order to sell at $5.00 or $5.01, depending on your internal algorithm for what's a "good price". You think your broker is giving you shitty fills? Well, then place the limit order yourself! No one is forcing you to trade at $5.00!
Note the ambiguity of "best price". A price good now may be a terrible price tomorrow.
Analogy: Let's say you're trying to sell a house at $500,000, but you can't find anyone right now to sell to. But then, a house flipper shows up and takes your offer. Later, you find that the flipper sold it for $550,000. Do you blame the flipper? You could have waited longer and sold it yourself for $550,000. You chose not to because you wanted to sell it immediately. On the other hand, if the value went down to $450,000, you'd probably be very happy, wouldn't you? The point is, you paid the price for selling it now. If you want a "better price", you can always sell later, but you have to be willing to take the risk.
There are plenty of ways to implement the bid matching part of a gated system to eliminate the effect of bid-submission order or order size. For example, a Uniform Price Auction could be used, where everybody submits sealed bids and all of the traders willing to pay the competitive market clearing price for the round get to trade. (See wikipedia for details).
I don't disagree. The auction-based system, with perhaps some complicated rule-set, may eliminate latency wars to a large extent. However, investors give up something in return. If the auction happens every hour, then investors cannot trade until those hours.
The goals of the stock market should be to efficiently and accurately value companies and allow all sizes of investors to fairly participate. The needs of people participating in th
I don't really understand where you're coming from. It clearly does not seem like you are in the industry, because your comments sound prejudiced without basis. In any case, you should think about this: what percentage of the investing public actually knows about market microstructure? I'm not talking bonds or stocks. I'm talking about the inside bid, inside ask, spread, etc. What percentage of the news articles out there say "HFT's are stealing your money" and actually provide evidence? From what I've seen, the best argument seems that "we don't know what they're doing and they're very secretive, so they must be doing something illegal."
So really, what evidence do you have that market makers don't help investors? As I mentioned, I'm sure that there are firms out there who abuse the market and make money off of unfair advantages such as flash trades. Unfortunately, all of these firms have been bundled up into "HFT" and the media has had a field day beating it up. Investors love to find someone to blame for the stock market going down. Whoever makes money, must be taking mine!
We're doing what old specialists used to do, except fairer. Specialists were pretty much monopolists in certain stocks. Without competition, the spreads naturally were huge.
For your information, we actually do talk about how much of the daily volume we're doing and what fraction of liquidity we provide. We're very proud of the fact that we are almost always on the inside bid and ask (the spread for which is often the minimum tick size, 1 cent) for many of the products we trade.
I've been an avid follower of/. for some time now. I've gained a lot of insight from reader responses, which are generally well thought-out, mature, and reasonable. On the topic of market microstructure, however, I feel/. falls woefully short. I cringe when I read comments that sound like something from Zero Hedge.
I work in HFT. I make markets. Obviously, there is an incentive for me to talk about all the good things HFT brings to the world. However, I also believe that we serve a function in the market. Perhaps not vital, but still a service nonetheless.
What do market makers add to the market? They're willing to stand on the other side of your trade. They serve a vital function to the market and we can trace them back to the specialist days on the floor. Let's all agree to start from there.
What do HFTs add to the market? Now this is where you have a large divide in opinion, and rightly so. Some HFT firms will engage in predatory behavior that is unfortunate, including quote stuffing and price manipulation. I am not writing to absolve all the bad things that many HFT firms do. However, in my view, ideally, HFT market makers add these factors: immediacy and continuity.
As an investor, you can go up to a trading terminal at any time in the day and someone (most likely an HFT firm) will be there to take the other side. That is immediacy. You also have access to price discovery that is happening every fraction of a second. That is continuity. These are ideal situations, and not every HFT adds these values. Firms that only remove liquidity are often not providing immediacy. Firms that manipulate prices are usually not providing continuity.
If you think, "HFT's will run at the sign of chaos!" I agree with you. The better, smarter, and faster firms will continue to stay in the market, but only up to a certain point. Why should anyone stand in the way when a big institution sells 75,000 ES contracts? We trade and provide liquidity so long as it's profitable. If you have a problem with that, you have a problem with capitalism. How do you possibly incentivize participants to absorb tail-end risk?
If you think, "But investors don't care about 30 microseconds!" I agree with you. The short reaction times are there so that we can manage risk. It indirectly adds value to the investor because it allows us to manage risk better, which allows us to provide really tight markets. Think about it. We're standing there for anyone in the world to trade against all the time. Adverse selection is the name of the game. Back in the specialist days, spreads were sometimes in dollars. Now they are in pennies, and in many liquid stocks, exactly a penny. I assure you -- if we ever move to a system that taxes each trade or throttles latencies, you will see spreads widen out immensely because it's harder to manage risk. If you impose a limit on the minimum life of a quote, you will see spreads widen because there's risk in standing in the middle of the highway for too long.
If you think, "But company values don't change every 30 microseconds!" I agree with you again. It's the possibility that they could change that necessitates high reaction speeds. Company valuations are stable -- on average. But once in a while, some information is leaked that damages the company's reputation or some big institution decides to buy a ton, and you're left with a huge position that's going against you. Should we stand there and absorb that flow even when it's not profitable?
The last point is probably the biggest factor in a gating system where trades only take effect every N seconds. You can only update your position every N seconds, so as a market maker, you're essentially putting out a lot more risk. Some firms will be smart about risk management and be able to provide tighter spreads and make money for themselves. Some firms will not and they will go out of business.
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All of you HFT programmers almost had me with the "we minimize the spread" arguments. But a $0.01 spread x 1000 transactions per second is still $10/sec while a $10 spread on a transaction that happens once a day is a hell of a lot less.
I think you're confused by what "spread" means. It doesn't mean that for every transaction, we're getting a cut of investor money. Think of it this way.
Say MSFT bid is $99.50 and ask is $100.50. That means you can sell for $99.50 and buy for $100.50. What market makers do is tighten that spread so it becomes $99.75 and $100.25, for example. Now in the first situation, if you wanted to buy 100 shares you would have paid $100.50 per share + broker fees. Let's say broker fees are zero. You just paid $10050. In the second case, you would have paid $10025, saving you 25 dollars. Note that broker fees are the same in both cases.
In reality, the MSFT spread is much tighter thanks to fast market makers, so you would probably pay $100.02 per share, so you would actually save closer to $50 on that transaction. Intense competition among different market makers makes it so that every stock has as tight a spread as possible. Think of any business that's competing with price -- offer products at too high a price and your competition will sell for less, adding value to investors and taking profits for themselves.
I read somewhere that before the great recession, there was a year when the financial sector was 40% of GDP. One way or another, you're skimming a huge and undeserved (as the great recession proves beyond a shadow of a doubt) amount of money off the top.
The keys is to the lies you tell yourself is this:
That finance in general has such a large percentage of GDP is unfortunate. But you're getting off-topic. If you're attacking the entire financial industry, I have no responses for you. Banks, hedge funds, etc. etc. I don't associate myself with all of them. My main point is that high-frequency trading is a technology, and it can be used for good and bad. Example of a good is tighter spreads, which I explained above.
> Trading is a zero-sum game.
Zero-sum games don't, by definition, contribute to the greater good, and no civilized person would ever play one for any serious stakes. If you do, you've either got a gambling problem or you've figured out your opponent's tell and you've unscrupulous enough to use that knowledge to take advantage of him.
Trading should NOT be a zero sum game. It should involve 4 parties: sellers, buyers, workers and consumers. Sellers are people who need cash to buy something else, like a house or retirement. Buyers are people who have more money than then need to spend right now. Workers are people who produce goods and services for wages. Consumers are the people who benefit from what's produced. That's not a zero sum game. In that game, everyone is a winner. It's honest, hard-working people who produce, consume, save and invest to benefit both themselves and their neighbors.
As stated earlier (see the post about wheat and bread), no one in the non-zero-sum economy needs anything traded at the ms or ns level. Once an hour or even once a day is more than frequent enough. And if that means liquidity goes down, that's fine. The only one who needs that much liquidity are the gamblers.
I should have been clearer. By zero-sum, I didn't mean that someone always gets screwed. I meant that someone always loses money, someone always wins money. But they can both win at life. You are very familiar with this. You buy food. You lose money. But you gain calories. The store earns money. Both players win, but the sum of money exchanged is zero sum. That is what I meant. If you actually read beyond my comment to the lines below, you would have understood it as such.
The concept is not so esoteric as you make it out to be. In every trade, someone loses money and someone makes money. However, th
You're right. I should have used the word "disclosure".
You are correct. If Waddell was the proverbial straw that broke the camel's back, the trading that occurred afterwards was the pack of hyenas feeding on the camel. The flash crash would not have happened without Waddell, but without the rabid selling afterwards, the flash crash would probably have been more of a flash blip. So you do have a point.
However, my point still stands. HFT is just a style of trading, not a strategy. You didn't need to be HFT to short sell E-minis that day. You didn't need to be HFT to be Waddell. You didn't need to be HFT to manipulate price action and take advantage of the panic. Any click trader who recognized the plunge would have sufficed. Those who sold the market did so because they were opportunistic traders, not because they were HFT.
The purpose of my post was that with new technology comes responsibility, and the quicker we realize that HFT is just another piece of technology, the faster we'll get to regulating it properly.
The fast market makers buy and sell lemonades at $1.00 and $1.01 respectively what banks are buying and selling for $0.10 and $5.00. Our customers are everyone that trades with us. We tighten spreads and save institutions millions in execution costs.
You're trying to paint every person working in finance with the "evil brush". There's more to it than that. You're frustrated with the collapsing housing market. Frustrated with corrupt corporations. Not every financial firm is Enron. Keep that in mind.
Thanks for the ad hominem. If you care to elaborate on any of the arguments posed, I will be happy to hear it.
Care to elaborate?
For every trade, there is a buyer and seller. Buyer makes X, the seller loses X (barring fees). The sum of values exchanged is zero.
The reason why the stock market exists is that it's not zero-sum utility. Like insurance, some people are willing to lose money in order to hedge out a risk or move risk to different products. Nonetheless, trading is absolutely zero-sum.
You're not barred from purchasing machines that are close to the exchanges. Contact your local exchange liaison and he'd be happy to set it up for you.
Is it an "unfair practice" if it's openly available to anyone who's willing to pay? Is it cheating if the CVS store closer to you gets more business than the Walgreens farther from you?
There are many actual instances where trading firms DO cheat. Educate yourself and you'll have much better arguments. Flash orders, for example. But co-location is not.
I have no idea what kind of conspiracy theories you're talking about. Are you complaining about the rampant speculation and panic in many markets? I don't see how that's related to HFT. I'm not defending speculation, nor am I defending market manipulation.
Most firms do not have enough capital to unilaterally push the market in one way or another. If the market's behaving erratically, it's usually because of the majority of players thinking in a certain way. If the value of the dollar falls, everything will rise in price, especially commodities.
You're confusing flash orders, which is indeed illegal -- they allow firms to get a peek at customer orders before the orders hit public exchanges.
But being fast as a competitive advantage, given that everyone receives the same information -- that's something entirely different. By the same argument you're making, Google should be fined because they have infrastructure that's vastly superior to the average person. If the average person wanted to compete with Google, he or she would need to build too many things.
I'm being a bit facetious, obviously, but you have to distinguish these concepts.
You bring up the valid points I was trying to get at. People should recognize HFT for what it is -- just a technique. A way to do something. Not a strategy. People used to deliver mail with cars. Now people use planes as well. The fundamental value-add is the same; the way in which it's being done is different.
You have strong feelings against the financial industry in general. I understand. Enron screwed over thousands of people with their shady tactics and outright manipulation of their finances. Banks used their position and superior knowledge of the markets to sell unsafe products recklessly and brought down the housing market. Unlawful HFT firms started using flash orders to their advantage, peeking at client flow before the information hit the public exchanges.
At the end of the day, every for-profit business is trying to make money. So don't pretend that we are alone in that respect. The only difference is that as consumers, you don't really understand the value of a few pennies being saved over billions of transactions. We may be saving the US economy, in aggregate, millions and millions. For any one person individually, it will be insignificant.
You have it backwards... shorter hold times = smaller risk. Longer hold times = larger risk. Do a thought experiment with a random walk. For any given period of time, there is a measure of expected move (0) and variance. If you hold positions longer, you're more likely to suffer more swings.
Your confusion arises from the fact that there are two problematic things here: market failures and HFT evils. Yes, HFT evils do exist. Flash orders are evil. They allow HFT firms to take a peek at orders before they hit the public exchanges. They should be eliminated. Step ups in options are not fair for similar reasons. They should be eliminated.
But something like the flash crash on May 6 was largely due to market failures. Someone bet that the US economy was going to collapse -- to the tune of $4.1 billion dollars. Some exchanges, for some reason, started quoting products at 1 cent. These failures contributed to the massive market swing.
Market making HFT is a continuation of... designated market makers back in the day. People would manually be assigned the task to provide liquidity for certain companies. Again, not all HFT is good. I'm sure there's HFT firms preying on unfair data and naive customers. But let's not throw the baby out with the bath water.
E-mail is used for the so-called "Nigerian" scams. Guns are used to murder people. Technological progress doesn't wait. The most annoying thing about this whole debate is how people are unaware of the bigger issues at hand. Monopolies in the currency exchanges forcing spreads that are 5% the price of the product. Consumers unknowingly buying illiquid, unregulated derivatives that banks charge exorbitant fees for, only to have those derivatives blow up and destroy the entire market.
I don't know why you're so opposed to the idea that there are things machines can do better than humans. Perhaps you can enlighten me on where you are coming from? Your arguments seem to belie a deep-seated dislike for everything HFT.
Anyway, being faster is tangentially helpful to consumers, in the sense that we're competing against each other for market flow. Pepsi and Coca-Cola probably worry about producing 12328 bottles per assembly line per day. Who cares if they produce 12328 or 12329? As a consumer, you just want your bottles. In market making, being faster allows us to manage risk better. We stand publicly so that investors can trade against us. Sometimes, someone will put in a massive order (probably some pension fund) and we will all get huge positions that we need to liquidate quickly. The fund gets a cheap price for all its shares, and we have the difficult task of liquidating it as quickly as possible. That's where our speed comes in. It may not benefit consumers directly, but because we can manage risk better, the spreads are thinner, thicker, and pension funds that manage your 401k can get more volume done at once.
I do agree that the arms race is unfortunate. Many in the HFT community wish the arms race to stop. If you think about it, the only people who benefit from this arms race is the arms producers: the companies that dig holes into the Earth to create a network line faster than any existing line. In order to simply stay in business, HFT companies have to fork up some dough for those lines. Trust me, we hate what this arms race has begun.
Also, please try to separate "market failures" and "HFT evils". The flash crash was caused by faulty technology and an irresponsible trader, NOT HFTs. The exchanges were quoting some products at 1 cent... Waddell bet $4.1 billion dollars that the US economy was going to tank... All of these events added to the events. With technology comes trouble. When cars were first introduced, everyone got worried about safety. Do people still die from cars? Yes, it is very unfortunate. But progress is not going to wait.
If you got this far, I commend you for having the patience to read an opposing viewpoint.
Discrete auctions could work. I can't think of any a priori reason why periodic auctions wouldn't work. They might even make the market place more efficient.
However, if you're willing to listen, I'm inclined to disagree.
First, investors get utility out of a continuous market. It's like having a convenience store open continuously from 8:30AM to 4:00PM, not in periodic intervals.
Second, that system still favors super-speed traders. Think about it. People will submit their quotes, but the market won't match them until after a period of time. That means the last entrant has the most advantage. As a result, you'll still want the fastest programs, best connections, the best programmers, etc. Even if you make everything hidden until the match (as in a dark pool) you can still process worldly information and wait till the last microsecond.
Third, that system will widen the spread, the difference between the lowest ask price and the highest bid price. Think about it. Let me stretch out the time so that it makes more sense in an everyday context. Imagine you're doing a lemonade stand business. You buy from suppliers, sell to consumers. If you were forced to only buy and sell once a month, instead of every day, what kind of limitations would you face? You would probably be extremely wary of overstocking, because the oranges might go bad (do they? let's just say they do for now). You could probably get away with charging more per drink because people know it happens so rarely. As a result, the costs of having to deal with the increased risk of holding the unsold oranges for longer are passed to the consumer.
There are dark pools, which you can read about. In such exchanges, all quotes are private from all participants. Only the machines see the quotes and generate matches. Obviously, you can probably back out information by analyzing your own trades, but because a lot of information is hidden, many institutions prefer to do volume on dark pools. However, as much as dark pools solve issues, they are somewhat bad for the market as well, because a lot of trading is done secretly. Average investors like yourself -- or anyone, for that matter -- has no visibility into the quotes -- the price discovery -- that are being generated.
There are different flavors of exchanges, all trying to solve the problem of risk transfer. You're not alone in advocating auctions. But it might not have the intended effect.
Thanks for reading the post, instead of just the first line. The food people are buying to feed their kids is probably cheaper because of HFTs.
Disclaimer: I work at an HFT firm.
The implied accusations are flying out of the page like daggers. I wish you, Slashdot readers, could see the world through my eyes. As techno-savvy as you are, you somehow love to hate on HFT without having any idea what it is. Don't get me wrong -- I really don't care if you hate it. What bothers me is that haters have NO IDEA what HFT is doing and basically project their hatred for finance onto it.
I have to say, this article is pretty level-headed. I was expecting more baseless accusations. Of course, the article throws around the typical "HFT was blamed for the huge drop in the stock market in May 2010..." If you cared to look at the linked WSJ article, you would have read that Waddell's desk had sold 75,000 E-mini contracts at the start of the flash crash. If you cared to look at the CFTC report that officially investigated the flash crash on May 6th, you would have read that CFTC blames the flash crash on some trader who executed a large sell order worth $4.1 billion dollars -- why, isn't that just about 75,000 E-minis?
You would have also read that HFT firms actually mitigated Waddell's mistake. They were there to absorb the thousands of E-minis and so dramatically lessened the initial impact. It's really quite admirable the amount of precision coders needed to invoke in order to create a system that executes so quickly and at scale during such a turbulent period. I was hoping that the discourse here would be more along those lines.
Unfortunately, the amount of volume that Waddell executed was too much risk for the traders to bear, so they started getting out of their positions. In fact, no one could handle a trade of such size. It was as if someone predicted the collapse of the US economy and bet $4.1 billion on it. The ensuing chaos was purely the after-effects of the initial destruction caused by Waddell.
New technologies can be used for bad. I bet there's plenty of bad traders manipulating the markets and using speed as an unfair advantage. We need to police HFT, for sure. But I'm also sure that people are using guns to kill other people out of malice, using cars to traffick illegal drugs, and using airplanes to destroy buildings. HFT is a style of trading. It's a technique, not a strategy. The sooner we realize this, the more progress we will make as a society in implementing policies and regulations.
You guys all hate on HFT, but you are really the ones benefitting from this technology. In market making there's a spread -- the difference between the lowest ask price and the highest bid price. Take a look at the most liquid stocks. They are probably trading at 1 cent wide spreads. Compare that to years ago when spreads used to be dollars. Go to a bank and look at the currency exchange rates. I just did a look into Bank of America's spreads. 100 euros gets you 135.35 dollars. Based on recent trading prices on the public exchanges, 100 euros should be able to fetch closer to 143.62 dollars. BoA is charging a spread that is more that 5% of the value of the product! I don't blame them -- the landscape in the currency markets discourages technological innovation and competition.
This phenomenon isn't true just for currencies. It's true for most products that are not regulated or traded publicly. You, the average investor, are being ripped off dearly investing into these opaque markets. The size of spreads is truly a symbol of capitalism. If there's competition, the spreads are tight. If there's monopoly, the spreads are wide.
You complain about HFT being super fast and "shaving off transactions" as if we somehow have access to your accounts and embezzle money a la Office Space. That's like complaining about WalMart having such efficient systems and internal logistics that your cereal is getting too cheap. Yes, I do believe that some traders use speed unfairly, and yes, WalMart probably did shady things we don't know about, but my point is that not every trader is bad. Technology
Oriol is very good—one-time World Cyber Games competitor, number 1 in Spain, top 16 in Europe
There seems to be confusion about the name of the player. The player that the UCSC article refers to, =DoGo=, indeed participated in WCG 2001 finals for Spain, but his name was Antonio Crespo Gomez.
Who knows what the context really was? Maybe the developers asked him to try a specific build order in order to see how the computer would respond. Maybe he did legitimately lose one game... out of a hundred, the only reason being he was forced to only use his mouse.
In any case, the biggest complaint I have is that he was a good player back in 2001. That was before the invention of mutalisk micro, the macro-oriented plays led by iloveoov, the micro-oriented strategies pursued by Boxer -- basically, before people figured out how to really play the game. The AI researchers undoubtedly utilized a lot of modern strategies. Also, no matter how good someone used to be, it's hard to be as good ten years down the line, even with crammed practice. I'd bet anyone that no computer in the next couple decades would beat actual progamers of today (by which I mean an A-team member of a progaming team in Korea, in a best-of-five).
Don't take this post as bashing the research -- I think it's amazing what they've been able to do. Just don't compare it to Deep Blue vs. Kasparov, because it's closer to Deep Blue vs. Middle School Chess Team Captain.
My last sentence may have been a cryptic.
What I meant was that a lot of continuous market making is managing fleeting imbalances of supply and demand that do not really reflect the stock's fundamental value. As a result, specialists really are not helped by fundamental analysis. They're just hoping to win cents here and there, and that's their edge.
You make good points. Market makers were providing plenty of liquidity before. However, I challenge you to find data suggesting that the bid-ask spread has, in general, gotten worse because of computerized market making. We should not discourage firms from providing the fairest price for investors, i.e. provide the tightest spread. These firms are competing for investor business, and that's how spreads get tightened (if you're not at the inside, you don't get the trade).
The spreads for the most liquid symbols are now at their minimum tick sizes, one cent. You can't improve on that, it's not mathematically possible. The argument can be made though, that the minimum tick size should be less than one cent. On stocks like Citigroup, it would probably save investors a lot. That's more of a regulatory issue though.
I don't disagree that market makers / specialists always existed. In fact, I emphatically agree! HFT market making (note that I'm not including predatory HFT algos) is basically that -- computerized market making.
Also, to your last comment -- why wouldn't you want market makers to get as close to the market as possible? That's a good thing! It's like Staples upgrading their technology to provide you with paper for cheaper. It's a win-win scenario. Instead of paying $25 for MS because the spread was $20-$25, the fastest market making firm now provides it for $23.35-$23.36, so you get your fill at $23.36. I'd say that's good for investors, isn't it? In the end, that's really the goal of all market makers -- to make the tightest spreads possible.
First of all, thank you for taking the time to explain your position.
What does it mean to "make markets"? Stock markets have been around for a hundred years without high frequency trading, and they worked just fine.
Exactly. They worked fine because market makers have been around for hundreds of years. High frequency market makers are just that... computerized market making.
Think of it this way. Let's say you want to make a trade. Buy 100 shares of Google. What would you do? You would probably call up your broker and ask him to buy your shares. The next part is what investors don't see, which is why the concept of market making is usually missed. The basic idea is... who is going to trade against you? If you're buying 100 shares, that means someone needs to sell 100 shares. What if no one is willing to sell 100 shares? Then you have to wait. Maybe you can wait a few minutes. Maybe an hour. If the stock is illiquid, you might have to wait many hours. If the stock is rallying, no one might want to sell to you for a long time.
That's where market makers come in. They don't own any of the stock, but they're willing to take the other side of your trade. As I mentioned, market makers make a continuous market possible. They're standing there ready to take either side of a trade. That allows you to think of a trade you want, enter it, and get it executed at a good price within the second.
Why do we need middlemen to quickly buy and sell stocks? They only are willing to do so if they can make money.
All businesses are willing to stay in business if they can make money. Doesn't mean they're not also providing a valuable service.
So if I put out a sell order and want to sell my stocks for at least $5, and there is a HFT firm in the market that buys my stock for $5 one hundredth of a second later, then a few seconds later my stock is sold to Bob for $5.02, then I am loosing out on 2 cents. To me, this has *negative* value.
"I want to sell for at least $5." What you're saying here is basically, "Give me the best price you can sell for, and sell it there." You're completely welcome to put in a limit order to sell at $5.00 or $5.01, depending on your internal algorithm for what's a "good price". You think your broker is giving you shitty fills? Well, then place the limit order yourself! No one is forcing you to trade at $5.00! Note the ambiguity of "best price". A price good now may be a terrible price tomorrow. Analogy: Let's say you're trying to sell a house at $500,000, but you can't find anyone right now to sell to. But then, a house flipper shows up and takes your offer. Later, you find that the flipper sold it for $550,000. Do you blame the flipper? You could have waited longer and sold it yourself for $550,000. You chose not to because you wanted to sell it immediately. On the other hand, if the value went down to $450,000, you'd probably be very happy, wouldn't you? The point is, you paid the price for selling it now. If you want a "better price", you can always sell later, but you have to be willing to take the risk.
There are plenty of ways to implement the bid matching part of a gated system to eliminate the effect of bid-submission order or order size. For example, a Uniform Price Auction could be used, where everybody submits sealed bids and all of the traders willing to pay the competitive market clearing price for the round get to trade. (See wikipedia for details).
I don't disagree. The auction-based system, with perhaps some complicated rule-set, may eliminate latency wars to a large extent. However, investors give up something in return. If the auction happens every hour, then investors cannot trade until those hours.
The goals of the stock market should be to efficiently and accurately value companies and allow all sizes of investors to fairly participate. The needs of people participating in th
I don't really understand where you're coming from. It clearly does not seem like you are in the industry, because your comments sound prejudiced without basis. In any case, you should think about this: what percentage of the investing public actually knows about market microstructure? I'm not talking bonds or stocks. I'm talking about the inside bid, inside ask, spread, etc. What percentage of the news articles out there say "HFT's are stealing your money" and actually provide evidence? From what I've seen, the best argument seems that "we don't know what they're doing and they're very secretive, so they must be doing something illegal."
So really, what evidence do you have that market makers don't help investors? As I mentioned, I'm sure that there are firms out there who abuse the market and make money off of unfair advantages such as flash trades. Unfortunately, all of these firms have been bundled up into "HFT" and the media has had a field day beating it up. Investors love to find someone to blame for the stock market going down. Whoever makes money, must be taking mine!
We're doing what old specialists used to do, except fairer. Specialists were pretty much monopolists in certain stocks. Without competition, the spreads naturally were huge.
For your information, we actually do talk about how much of the daily volume we're doing and what fraction of liquidity we provide. We're very proud of the fact that we are almost always on the inside bid and ask (the spread for which is often the minimum tick size, 1 cent) for many of the products we trade.
I've been an avid follower of /. for some time now. I've gained a lot of insight from reader responses, which are generally well thought-out, mature, and reasonable. On the topic of market microstructure, however, I feel /. falls woefully short. I cringe when I read comments that sound like something from Zero Hedge.
I work in HFT. I make markets. Obviously, there is an incentive for me to talk about all the good things HFT brings to the world. However, I also believe that we serve a function in the market. Perhaps not vital, but still a service nonetheless.
What do market makers add to the market? They're willing to stand on the other side of your trade. They serve a vital function to the market and we can trace them back to the specialist days on the floor. Let's all agree to start from there.
What do HFTs add to the market? Now this is where you have a large divide in opinion, and rightly so. Some HFT firms will engage in predatory behavior that is unfortunate, including quote stuffing and price manipulation. I am not writing to absolve all the bad things that many HFT firms do. However, in my view, ideally, HFT market makers add these factors: immediacy and continuity.
As an investor, you can go up to a trading terminal at any time in the day and someone (most likely an HFT firm) will be there to take the other side. That is immediacy. You also have access to price discovery that is happening every fraction of a second. That is continuity. These are ideal situations, and not every HFT adds these values. Firms that only remove liquidity are often not providing immediacy. Firms that manipulate prices are usually not providing continuity.
If you think, "HFT's will run at the sign of chaos!" I agree with you. The better, smarter, and faster firms will continue to stay in the market, but only up to a certain point. Why should anyone stand in the way when a big institution sells 75,000 ES contracts? We trade and provide liquidity so long as it's profitable. If you have a problem with that, you have a problem with capitalism. How do you possibly incentivize participants to absorb tail-end risk?
If you think, "But investors don't care about 30 microseconds!" I agree with you. The short reaction times are there so that we can manage risk. It indirectly adds value to the investor because it allows us to manage risk better, which allows us to provide really tight markets. Think about it. We're standing there for anyone in the world to trade against all the time. Adverse selection is the name of the game. Back in the specialist days, spreads were sometimes in dollars. Now they are in pennies, and in many liquid stocks, exactly a penny. I assure you -- if we ever move to a system that taxes each trade or throttles latencies, you will see spreads widen out immensely because it's harder to manage risk. If you impose a limit on the minimum life of a quote, you will see spreads widen because there's risk in standing in the middle of the highway for too long.
If you think, "But company values don't change every 30 microseconds!" I agree with you again. It's the possibility that they could change that necessitates high reaction speeds. Company valuations are stable -- on average. But once in a while, some information is leaked that damages the company's reputation or some big institution decides to buy a ton, and you're left with a huge position that's going against you. Should we stand there and absorb that flow even when it's not profitable?
The last point is probably the biggest factor in a gating system where trades only take effect every N seconds. You can only update your position every N seconds, so as a market maker, you're essentially putting out a lot more risk. Some firms will be smart about risk management and be able to provide tighter spreads and make money for themselves. Some firms will not and they will go out of business.