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Comment by crdoconnor | Hacker News Reader

>I don't understand why HFT is still around, if it's considered a problem.

Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power.

>Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets?

Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?".

An almost microscopic tax on transactions would prevent it, though while having a minimal impact on all other trading activity.

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This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. (You can ballpark the numbers by multiplying trade volume by the spread.)

For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. HFT is tiny, a drop in the bucket compared to the rest of the financial industry. Further, many big players in the industry are against HFT since HFT reduces their information advantage over smaller players [2].

The danger in a 1-second tick is that a) a massive change like this is hard to do [3] and b) it would likely increase volatility. A stylized fact of dynamical systems is that continuous feedback reduces volatility, whereas discrete step sizes increase it - witness how many numerical ODE solvers can blow up even while the underlying ODE is stable.

[1] https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYI...

[2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...

[3] Bloomberg, Excel and other calculators contain mathematical errors (e.g., "weekends are sometimes treated as a business day for the purpose of interest accrual") which cannot be fixed because the change would be too disruptive.

FWIW, the estimates I hear kicked around from Tabb Group and the like are more in the $1-5B range, not $10-50B.

Which is to say, even a tinier drop in the bucket.

That's the "profit" number which is useful and much lower than people expect, but not what people normally use when describing the size of an industry.

>This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1].

I'm not sure what your point is here? There's more to finance than HFT? There are other, bigger rip offs out there?

His point is that small industries (especially ones with very low margins like HFT) cannot wield the political muscle required to invoke "regulatory capture". For instance BlackRock, a large hedge fund that has been very vocal in it's anti HFT stance made more profits in 1 quarter last year than the entire HFT industry. If regulatory capture was going to happen, don't you think they would be in a better position to accomplish this?

Bill Ackman is another giant player who is highly vocal against HFT and is known to spend donation money to attempt to make trades go his way.

HFT is the little guy in this story, the little guy doesn't get to create regulatory environments.

The few larger players who came out against it have done so only relatively recently, and in Goldman's case, only subsequent to being under investigation by the AG for its own HFT practices.

This is simply untrue.

http://www.reuters.com/article/2009/12/02/us-highfrequency-i...

A Senator quoted against high frequency trading at least 5 years ago. Principal Financial is also quoted.

One Senator, huh?

Found in a 2 minute google search. Your position is false, that no one was against HFT until recently. Large participants have been actively against it for a very long time, further pointing out how incorrect your position is on regulatory capture.

You have an ax to grind and an incomplete understanding of how the market and HFT work. It makes you look foolish.

>Found in a 2 minute google search. Your position is false, that no one was against HFT until recently.

My position was that no large banks or hedge funds or other concentrations of political power were against it until relatively recently. Which is completely true.

An individual senator is not capable of making vast changes to the law by themselves. Your belief that this IS possible is completely absurd.

>You have an ax to grind and an incomplete understanding of how the market and HFT work. It makes you look foolish.

Frankly I don't know how you're still defending barclays for selling an service promising freedom from HFT predators and then introducing HFT traders to it so they can collect additional fees.

Your belief that these traders were dumb and did not know what they were buying and therefore deserved to be lied to by Barclays is beyond retarded. They knew exactly what they were doing. You do not.

"My position was that no large banks or hedge funds or other concentrations of political power were against it until relatively recently. Which is completely true."

I mentioned several giant hedge funds (orders of magnitude bigger than the entire HFT industry) that have been arguing against HFT for a very long time. Further, the first article I found on a 2 minute google search, mentions a large fund that was speaking out against HFT in 2009. This is as simple of proof as I can provide that your position that HFT is not opposed by large finance groups as untrue.

"Frankly I don't know how you're still defending barclays for selling an service promising freedom from HFT "

Not once in this whole thread have I defended Barclay's and trying to paint me with that brush is either a sign of extreme obtuseness or terrible rhetoric. What I argue is that the reason Barclay's needed to defraud their customers is that their claim (and all other dark pool's) claim that they could provide a better trading environment by excluding HFTs has been historically proven as false. Traders are not dumb, they move to the venues that provide them with the best trading environment and that has continued to be venues that allow market makers EVEN IN THE FACE OF FRAUD.

No matter how many times you paint HFT as "predators" or "sharks" or as "spearing whales" you've yet to describe a single behavior attributed to HFTs that is in any way unethical or illegal.

[edit: having to work around HN reply rules, I apologize] To the reply below about BlackRock. Do you really think it is a realistic comparison to compare BlackRocks recent profit (2013) to one of HFTs best year (2009)? At the very least you should have mentioned that it was different years.

"Were this true, dark pools would not exist in the first place"

Except that there are all manner of product offerings that don't make sense for their clients. The easiest analogy in this case is extended warranties. "If extended warranties were so bad why do so many people buy them?" Of course this is a ridiculous argument. People buy extended warranties to hedge risk that is over rated due to warranty salespersons. The exact same way dark pools are.

" There is a link I posted below in response to you that describes such a strategy"

It does no such thing. It hand waves a lot of semi-technical non specific jargon around an idea that is easy for people to get upset about. I could just as easily write an article about how multicast networks were dangerous. It wouldn't make it so.

>I mentioned several giant hedge funds (orders of magnitude bigger than the entire HFT industry)

You mentioned Blackrock, whose net income last year was $3 billion.

http://www.wallstreetandtech.com/trading-technology/the-real...?

"TABB Group estimates that annual aggregate profits of low-latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them."

>What I argue is that the reason Barclay's needed to defraud their customers is that their claim (and all other dark pool's) claim that they could provide a better trading environment by excluding HFTs has been historically proven as false.

Were this true, dark pools would not exist in the first place. Traders would have stuck to the public exchanges and paid their (lower) fees.

>No matter how many times you paint HFT as "predators" or "sharks" or as "spearing whales" you've yet to describe a single behavior attributed to HFTs that is in any way unethical or illegal.

False. There is a link I posted below in response to you that describes such a strategy (spearing the whale) in precise detail.

"You mentioned Blackrock, whose net income last year was $3 billion. http://www.wallstreetandtech.com/trading-technology/the-real...? "TABB Group estimates that annual aggregate profits of low-latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them.""

Thanks for using 1 number from now and another number from 5 years ago. Are you willing to concede the rest of your rhetorical high ground?

Even if we discount the market impact numbers that you have to juke, I found a senator in 2009 speaking out against HFT. Can you find one defending it?

"Were this true, dark pools would not exist in the first place. Traders would have stuck to the public exchanges and paid their (lower) fees."

Maybe if the buy side firms didn't engage in fraud to keep their clients out of public exchanges that would be true.

> Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power.

Your invocation of the "regulatory capture" trope doesn't even make sense in this context. The big banks and hedge funds aren't the major HFT players, and many of them are opposed to HFT.

>many of them are opposed to HFT.

Remind me which of those banks are calling for it to be strictly regulated or prohibited?

I've heard that some banks are now selling "protection" against HFT sharks in the form of dark pools (which is often not really protection at all - see Barclays). Bearing that in mind I can't imagine that it would hurt for them to put out a marketing message that is disdainful of the practice while still quietly engaging in it.

Goldman Sachs: http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014...

They're under investigation for fraud relating to HFT:

http://dealbook.nytimes.com/2014/05/09/goldman-under-investi...

I imagine that WSJ op ed is probably damage control.

I don't see your point. It's entirely consistent to say that restrictions on HFT would be in Goldman's interests, but until those are in place, they make some money engaging in HFT. In other words, the advantages to Goldman of restricting HFT (which hurts its major business line of trading on information advantages) would be worth more than losing whatever little HFT revenue they make (they're not a major player).

When you say HFT sharks, what do you mean? What practice are you describing. The reason that this is important is that the range and scope of electronic/algorithmic trading is highly varied. Saying you are against HFT can mean that you are against a wide variety of things.

You might like to read Matt Levine's article on Barclays. Choice quote:

Barclays, like other dark pool operators, knew this: that you can run a pristine dark pool without "predatory" high frequency traders, and without much trading, or you can run a useful dark pool with high-frequency traders.

http://www.bloombergview.com/articles/2014-06-26/barclays-no...

tl;dr; No HFT, no liquidity, and people who want to trade take their business elsewhere.

[edit: If Barclays didn't need to bring HFTs in to provide liquidity, why did they subsidize HFTs? Matt Levine crunches the numbers - the biggest HFTs paid Barclays about $3M assuming a wild overestimate of the amount of liquidity they take, compared to institutional investors paying $4B.]

You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity.

Barclays were ripping off their clients. It wasn't even a complicated scam.

"You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity."

Except that is untrue historically. The reason dark pools sell that privileged access is that they can't provide liquidity any other way and their clients find it better to trade in HFT allowed environments than in ones without liquidity.

IEX is trying something new, driving liquidity via scare tactics and publicity but we still don't know how that will work out.

"Barclays were ripping off their clients. It wasn't even a complicated scam."

Barclay's lied about allowing HFT firms into their dark pool. That is fraud but it has nothing to do with bad behavior on the part of the HFT. If you are suggesting that dark pools have inherent conflicts of interest that might be a more valid argument than "HFT IS THE EVILS"

>Except that is untrue historically.

Historically there was no HFT. Historically we have managed to have liquidity without it. Historically, the thing that brought us the greatest liquidity (something that is useful but vastly overrated) in the equities markets is electronic trading.

>The reason dark pools sell that privileged access is that they can't provide liquidity

I think it's cute the way that you're pretending that they were doing their investors a favor. They were selling dark pools to investors because investors WANTED to get away from HFT. If they wanted HFT infested waters they could have traded on the public markets!

What the fuck do you think they were DOING there in the first place? They happily sacrificed a sliver of extra (and largely unnecessary) liquidity for the chance to not get ripped off.

Historically (in the 1980s) liquidity was 10x-20x more expensive than it is today. No one is willing to pay those sorts of prices anymore.

Nobody is suggesting turning off electronic trading systems and going back to pen, paper and shouting in a pit.

So computers are fine. Faster is fine. Just not too fast? Because once we pass some sort of arbitrary speed barrier then....what happens exactly?

The market stops rewarding those who do the best research and make the best value judgments about stocks and simply rewards those with the fastest exchange connections and best hardware (who can parasite upon the research and risklessly make money by covertly front running it).

If value investors stop being rewarded for doing good research and correctly assessing the true value of a stock they will usually withdraw from the market (c.f. market for lemons: akerlof).

It should be pretty obvious why a stock market whose values are disconnected from reality is a bad thing, and why having a pool of investors who do good real world research and get rewarded for it is a good thing.

They thought they wanted to get away from HFT. But once they were away from HFT they realized that the liquidity wasn't there and started trading on other venues. Barclay's dark pool was failing as it had no participation and like almost all the other dark pools in existence to get around this they started letting HFTs in.

The difference is that in Barclay's case they lied about it and thus committed fraud.

>They thought they wanted to get away from HFT. But once they were away from HFT they realized

THEY WERE PAYING TO BE IN A DARK POOL IN THE FIRST PLACE BECAUSE THEY WANTED TO BE AWAY FROM HFT. There was no "they realized".

Once they got away, Barclays tried to figure out if there was any BARCLAYS could extract more profits from these dark pools than the fees they were already paid. There was: allow HFT sharks to take advantage of their customers and collect fees for letting them do so.

If what you said were true (and frankly I cannot possibly see how you could believe it) they would have ZERO reason to commit fraud and lie about selling privileged access to HFT traders.

"Once they got away they did NOT start whinging that there was not enough liquidity."

Of course they didn't. Professional market participants don't whinge. They go to venues that provide the services they want, namely cheap liquidity. Those venues were ones that allowed HFT market makers.

When you say "they got away", you do know that those market participants moved to open exchanges where HFTs "run rampant" and stopped paying Barclay's for their service.

"allow HFT sharks to take advantage of their customers and collect payment for letting them do so."

A) what do you mean when you say HFT shark? You keep using that term, in what I assume is a pejorative but it doesn't mean anything.

B) If the point was extracting more fees why did Barclay's subsidize HFT trading? They charged HFTs an order of magnitude less than their clients, that was a central part of the complain. If it was an example of allowing advantage taking, wouldn't the fee structure be reversed? That is, if I have a chance to fleece someone, wouldn't I pay up for that instead of require payment for it?

"If what you said were true they would have no reason to lie"

Of course they had a reason to lie. They claimed that they could provide a high liquidity environment without letting market makers trade in their dark pool, despite the overwhelming historical evidence to the contrary. Admitting that they were wrong brings their whole value proposition to buy side investors into question and delegitimizes their dark pool.

>Of course they didn't. Professional market participants don't whinge. They go to venues that provide the services they want, namely cheap liquidity.

If they prioritized liquidity above all else, as you appear to think they should, they wouldn't be using a dark pool in the first place. They would have been using a public exchange.

>When you say "they got away", you do know that those market participants moved to open exchanges where HFTs "run rampant" and stopped paying Barclay's for their service.

Yes, I'm sure they all left after it was revealed that Barclays was lying to them and allowing HFT predation on their trading activity.

>what do you mean when you say HFT shark?

An HFT trader that parasitically extracts value from a non-HFT traders - often institutional investors (e.g. pension funds) putting through large orders. The link I put below describing a 'whale' to you explains just one parasitic strategy.

>If the point was extracting more fees why did Barclay's subsidize HFT trading? They charged HFTs an order of magnitude less than their clients

A) Subsidizing != Charging lower fees B) Citation, please (that OVERALL fees were higher, not just fees per trade - HFT will obviously get bulk discounts).

>that was a central part of the complain.

The central part of the complaint was that the service was advertised as HFT free when, in fact, it was not. The marketing literature is all out there saying this.

"If they prioritized liquidity above all else, as you appear to think they should"

No, I think they should prioritize execution costs above all else. It turns out that fees then liquidity costs are the biggest variables in determining execution cost. Public exchanges with low fees and high liquidity provide the lowest execution cost, no matter what the dark pool salesmen claim (fraudulently or not).

"Yes, I'm sure they all left after it was revealed that Barclays was lying to them"

Actually the complaint shows they were leaving before the lying started. This is what you are missing. The lying was a response to the natural market condition that execution costs are lowered in environments with HFT participants. That Barclay's had staked their reputation on that not being true is what led to the fraud.

"The central part of the complaint was that the service was advertised as HFT free when, in fact, it was not."

And that is fraud. The book should be thrown at Barcaly's but that doesn't add any insight into the arguments surrounding HFT, other than in real world conditions, even buy side clients prefer venues with HFT provided liquidity, even in the face of fraudulent marketing claims.

Exchanges subsidise market-making, because that is the unquestionably beneficial activity.

But the high-frequency aspect of it is separate from the algorithmic-trading aspect of it, so one can criticise high-frequency trading for its uselessness, while accepting that algorithmic trading is hugely beneficial.

You are acting like algorithmic/hft/market making terms are clearly defined.

It turns out that the vast majority of HFT are algorithmic market makers. Why is that? Because if they can trade more they are more profitable (if they are good at market making). This means that they can make less on each trade driving down the bid/ask spread which is good for everyone. Further, if they can reduce their risk by trading fast, then they don't have to price that risk into the spread once again making the price better for everyone.

You can't separate hft from algorithmic market making because it is a central driving premise of the industry.

I think you can separate them perfectly well.

Algorithmic traders compete on price: they aim to offer better prices, and narrower spreads, to liquidity consumers.

High-frequency traders compete on the speed, with which orders are placed. The parasitic traders are the ones who profit not by providing you with a service, but by taking advantage of your inability to place and remove orders as quickly as they can.

You can do both of these at the same time, but the two competitive advantages are different and separate.

Market making is what all this activity is supposed to do, because it is a service provided by the liquidity providers, through the exchanges, to the liquidity consumers.

I think the distinctions are clear enough.

Market makers compete with each other on speed. If market maker A and B both want to provide you liquidity at $10.00/10.05, whichever one is fastest will be the one to get your business.

If market maker A wants to compete on price and provide liquidity at $10.003/10.049, too bad. That's illegal. He must compete on speed instead.

I wrote some tutorials on mechanics of this a while back, you might find them useful:

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

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

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

"If market maker A and B both want to provide you liquidity at $10.00/10.05, whichever one is fastest will be the one to get your business."

Unless the allocation is pro-rata, but it usually isn't.

By being very fast at taking into account new information as fast as possible market makers reduce their risk, thus allowing them to offer better prices.

Price and speed are closely intertwined.

The vast majority of HFT trades are market making - with razor thin margins. The vast majority of profit making trades do not involve market making, however - they usually involve trading on an information advantages, or spearing a whale (large institutional investor trying to buy or sell large amounts of stock).

It's good to mix in a large dose of almost-zero-profit market making trades in with your more ethically and legally dubious trades. It helps cover your tracks - both from regulators and other market participants.

Do you have a citation for this? What does "spearing a whale" even mean? What is ethically or legally dubious about electronic market making?

Please just come out and say what you think HFT is, how it works and why it is ethically or legally dubious, because your claims in this thread border on the hysterical.

There was a rather famous incident with a trader nicknamed "London Whale", who accumulated a massive position in the CDS market, which then led JPMorgan Chase to lose immense amounts of money on the trade. The money went to those people that correctly figured out what was going on in the market.

In general, if you know important information about someone else's positions, you can sometimes use that information to profitably trade against them.

The London Whale did not involve HFT. In fact, it is a rather good example of how little HFT matters in the world of finance. One division at Chase (and if you believe them 1 man) cost the company more in 1 year than HFT makes in profits. The other sides of that trade were not HFT firms, but other human driven trading funds. So of course information advantages allow you to make money, that's the point of the market and it is no more unethical or illegal when an HFT makes money than it is when those human traders were on the other side of the London Whale.

http://www.demos.org/publication/cracks-pipeline-part-two-hi...

>A classic aggressive strategy involves hunting and trapping “whales.” It is a good example of aggressive HFT strategy.

I apologize for not explaining terminology used by the financial community in laymans' terms.

This blog article has huge technical problems and is not a financial community technical journal. It is in fact a political blog with it's own agenda to push. Even without these giant warning signs what they describe in this article is not illegal or unethical.

After reading this article your assertion is that it is unethical and/or illegal for market makers to use standard market orders that are filled in legal and standard ways as price information signals, but it is not illegal and/or unethical for large market participants to hide their order flow with specialized orders and/or venues?

>It is in fact a political blog with it's own agenda to push.

It is describing a commonly used HFT trading strategy in objective terms. Your ad hominem attack on their credentials and agenda does not change this.

>After reading this article your assertion is that it is unethical and/or illegal for market makers to use standard market orders that are filled in legal and standard ways as price information signals, but it is not illegal and/or unethical for large market participants to hide their order flow with specialized orders and/or venues?

What was just described is detecting a large institutional order through the use of 'pinging' trades and then effectively taking advantage of that knowledge by trading ahead of it. That is NOT market making.

It is not strictly speaking insider trading or front running either, but it combines features of both practices.

"Your ad hominem attack on their credentials and agenda does not change this."

An ad hominem attack assumes that my attack is based on an irrelevant fact about the arguer. That the arguer has no experience in, and cannot articulate a common description of the issue in question is not an ad hominem attack. Just like saying that I have no basis in describing rabbinical law and should therefore not be determining what is and is not kosher, me saying that your source doesn't know what they are talking about when it comes to electronic trading is what is important.

"What was just described is detecting a large institutional order through the use of 'pinging' trades and then effectively taking advantage of that knowledge by trading ahead of it."

What is described in that article is 1 market participant, using a well known and perfectly legal market means to send in orders that they want to trade and then extrapolating from the completion of those orders, information about another participant that is using highly exclusionary, extra-market venues (dark pools) to hide their desire to change the price of an instrument.

That you think the market participant that is most disadvantaged in this relationship should be penalized more says more about your biases than anything else in the market dynamic.

Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?"

The lack of live market book data means that you won't need the ultra fast connections, so at least one part of the networking arms race becomes de-weaponised.

You still have the problem of it being advantageous to bid at the end of the auction, but this could be solved by pricing. Just like the exchanges give incentives to offer prices rather than to take them, they could make bidding at the start of an auction cheaper than at the end of it.

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