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Comment by w0utert | Hacker News Reader

I'm not knowledgeble about HFT by any stretch of imagination, but I watched this epsiode of VPRO Backlight when it aired on dutch TV, and what I got from it (not just from Bodek himself, but also the Nanex guy) that initially, these 'special' order types had been a close-kept 'secret' only known by insiders. Maybe not their existence, but how they could be used to 1-up every other HFT algo that wasn't in on this trick.

The video isn't only interesting because of Haim Bodek's allegations by the way, there's quite a few fairly high-profile people (formerly) active in the HFT world commenting on how markets are effectively broken and unstable because of opaque HFT algorithms, stock exchanges actively promoting HFT to drive up the volume of trades (and hence their profits), and regulators not really doing anything to reduce the risk of flash crashes or penalize parties that completely break the market every once in a while.

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These order types are highly regulated by the SEC and FINRA. None of this is a secret - any new order type has to be submitted to the regulators in a public process before it is authorized. Exchanges and trading venues are required by law and regulation to be transparent.

I don't know how Hide-not-slide orders could possibly be described as a "close-kept secret":

http://bit.ly/17l8djU

Admittedly, just like Haim Bodek, DirectEdge uses an annoying voiceover format rather than just writing an easily skimmable document.

I don't think the actual order type was a secret, just that some HFT firms figured out a way to use it which gave them an advantage over other HFT firms. The firms who didn't understand it lost out.

OMFG, people with smarter strategies have an advantage in the marketplace! Call the SEC!

The whole point is that these 'smarter strategies' are only smarter because they are exploiting arbitrary API conventions, not smarter because they improve the utility of markets to society in general. Which is a tragedy, because if all these geniuses were working in the fields they trained in - computer science, physics, or bioinformatics - they would be contributing to society on a more fundamental level.

There are several fallacies to this sort of argument: 1) The myth of the HFT geniuses. Like any other industry there are smart people in HFT, there are also dumb people & bad software developers. In some ways the industry is very insular and has many bad habits. 2) We could harness all these people to something that provides more utility. It would be great if that were true, but how do you do that? Historically, centrally planning what careers people are required to follow has led to pretty bad outcomes. Conversely, if you think you can provide more utility by hiring away some of these smart people, nothing is stopping you.

> 1) The myth of the HFT geniuses.

Myth? The finance industry, where the HFT folks are near the top, pays epic salaries for the smartest people. They do this to hire the best and the brightest, and would not continue to do so if it did not work.

In the documentary, Haim relates a story where the team that he was on included PhDs in bioinformatics, physics, and mathematics. This does not look like a myth to me. The mathematical knowledge required to understand and be competitive in the HFT environment, coupled with the software development knowledge is very rare. This industry consumes the time of geniuses in order to function and pays them well for it - that this attracts dumb people and bad software developers that are occasionally hired hardly makes the existence of these geniuses a myth.

> 2) We could harness all these people to something that provides more utility. It would be great if that were true, but how do you do that?

Distributed self-organized common pool resources (http://en.wikipedia.org/wiki/Common-pool_resource).

Disclaimer) I work in HFT and this is all anecdotal.

I have found very little correlation between advanced degrees and ability to determine valuable trading strategies. In fact, the strategies that most people bemoan the most with HFT require the least amount of mathematics because they are very simple.

I've also worked outside of trading in both big institutions & start ups. The ratio of genius to average to bad seems about the same in all of these environments.

As far as the common pool resource approach, the problem with that is that it will most likely tilt the balance of power in the markets even further into the hands of a few giant institutions. Why it is popular to protect the poor investment bankers from the ravages of HFT baffles me.

Your first point isn't a fallacy to the argument. If they are good enough to to a job there, they're good enough to do a job elsewhere.

Your second point is trivially answered: you let the market decide where they work.

That's not obvious to you because you conflate "provide utility" with "make money". There are lots of things that make money that provide no utility. A large part of the history of business regulation is basically restricting those so people focus on providing utility rather than making money at things that provide zero or negative societal value.

The argument you respond to is basically suggesting that HFT is not generating any value for society. If you want to demonstrate that it's false, you have to show that HFT creates value in line with its costs.

Fine, but why doesn't every new industry have to make this same argument?

It's pretty obvious to me that social networks have some pretty dangerous attributes (decrease in privacy & personal securty, etc) to them. Do these dangerous attributes outweigh the value that twitter provides? Who decides and why?

Fine, but why doesn't every new industry have to make this same argument?

Because most new industries aren't within the financial industry, messing with the fundamental operation of markets. Those that are have to make that argument.

I think every new industry does have to make this argument. And they have to make it to their industry regulators and to the people who employ them. That is we, the people.

I agree that there are improvements that could be made to the HFT world. Most notably, eliminating the subpenny rule, which acts as a minimum wage for HFT:

http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html

http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...

I'm just suggesting that using a callback API rather than polling is hardly a great example of HFT shenanigans.

I don't think that someone as apparently smart as Haim is spent a year of his life troubleshooting an API call. There's got to be more to it than that.

As opposed to exploiting the websockets API to build yet another webchat app.

I'm sure selling on Sub-Prime mortgages was a completely legal 'smarter strategy' at one stage too.

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