4 ms·

I agree that it's a waste of talent and money, but how is it evil?

by omellet 11y ago

Frondo 11y ago
It's an excellent example of the middleman that only extracts money from a system, that adds no value to the system. They insert themselves into the transactions where they can siphon off very small amounts of money over a very large number of transactions. Nobody benefits but them from what they're doing, no one walks away with something in their hands or brains by their actions. It's legal, but it isn't right or a good thing.
- __d 11y ago
  The counter argument is that they do provide a benefit, by providing liquidity and/or making price discovery more efficient. Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.
  - Marazan 11y ago
    They cannot add liquidity. They HFT can only make money when there are slower traders willing to buy and sell. Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.
    - vasilipupkin 11y ago
      this is incorrect. HFT can make money adding liquidity to a market that erroneously is lacking in liquidity ( mispricing )
    - tptacek 11y ago
      Look at a market without market-makers. Housing is a good one. Houses sell only when there are "slow" traders willing to buy and sell. Have you ever bought or sold a house? Would you like the financial markets to be more like real estate?
      - Frondo 11y ago
        The alternative to HFT is not the real estate market. The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.
        tptacek 11y ago
        The markets in the decades before HFT were crooked like a bucket of fish hooks! They were NOTORIOUSLY corrupt. Everyone was scamming everyone else. The entire market was a giant grift. Are you really sticking up for 1980s trading? Or have you just not done much research about how it worked?
        Frondo 11y ago
        Really? And now, with HFT, they're no longer crooked? If I remember right, in the 2000s we've seen a ton of crooked market scandals (fraudulently rated securities, LIBOR, etc etc). I don't see this relationship you're positing between HFTs and a non-corrupt trading market at all.
        tptacek 11y ago
        That's an illogical response.
        Frondo 11y ago
        You said: prior to HFTs the markets were corrupt, the entire market was a giant grift. You implied that, without HFT companies, we'd be right back there, though I see now that you didn't explicitly say exactly that.
        tptacek 11y ago
        For your argument to make sense, all forms of corruption would need to have a single cause, and all interventions to reduce corruption would need to impact all forms of corruption. That's nonsensical and not a point I'm willing to engage further with. I think we've pushed this thread far enough to the right margin of the page.
  - Frondo 11y ago
    I don't think it's acrimonious to say that no, that liquidity is not beneficial to society as a whole. I struggle to see how any sector other than the financial sector would suffer if all trades happened once a second, or even once a minute. No process in the human world is going to change the value of a company quicker than that.
    - tptacek 11y ago
      It's not "acrimonious", it's just wrong. Liquidity keeps spreads narrow. Wide spreads are a tax paid by retail investors to a cabal of sell-side firms.
      - Frondo 11y ago
        We don't need the amount of liquidity the HFT people say they're providing. No one benefits but them. They're not adding value to society.
        tptacek 11y ago
        So what's the RIGHT amount of tax we should be paying to commercial market-makers for the privilege of trading? The residential real estate market is gigantic, a demonstrably functional piece of the US economy. Maybe the stock markets should work more like the real estate market. Forget about liquidity. Who needs it? Instead, we'll just pay seven percent of every transaction to an "agent".
        Frondo 11y ago
        Good question! I don't have an answer to that. I do know that the markets survived just fine before the HFT companies came along, and now that they're here, I don't see society as a whole any better off for their presence. Maybe, without just saying "they provide liquidity" and leaving it at that, you can explain how the post-HFT world is better for anyone but the HFT companies?
        11y ago
- kasey_junk 11y ago
  > They insert themselves into the transactions Be very clear what you mean when you say this. Because the vast majority of the time when people talk about HFT, the only way the "insert themselves" into transactions is by acting as the counter party to one side of the transaction. In this context they add a lot of value to the system, they smooth the demand curves in time and take on some of the risks of warehousing supply.
  - ConfuciusSay 11y ago
    The big claim with HFT is they "add liquidity", but there's evidence that shows the opposite. Indeed it seems like HFT's only add liquidity when it's already plentiful, but reduces liquidity when it's really needed. The Fed has said as much recently.
    - kasey_junk 11y ago
      > The big claim with HFT is they "add liquidity" I'm not sure who is making that claim, but I think what they are implying is that HFT "provides liquidity cheaper than the previous system of pit traders" or even "fragmentation of exchanges has dramatically brought down exchange fees at the cost of added complexity for liquidity providers (and possibly liquidity consumers). Only HFT systems could have cheaply dealt with this new complexity". In any case, I'd sum it up as "it is cheaper to trade now after the rise of HFT than at any other time, at least some of that is because they can market make more efficiently than a dude in a vest". Vanguard for one agrees with me (http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...). What many critics have claimed is that this has come at the cost of an increase in volatility, especially in the form of flash crashes and it is unclear as of yet if that is better/worse than the traditional liquidity crunches we saw under the previous regime and still see in markets not dominated by HFT. The Fed was specifically talking about this in the context of treasury bond (and futures) volatility and a skeptic might wonder which is more likely to have caused volatility in the treasury markets, HFT or unprecedented fed monetary policy. None of which is germane to the question of what the OP meant when he said that HFT insert themselves into transactions.
jegutman 11y ago
Also the waste of talent argument is a red herring. People who say that assume the alternative is no financial system in their heads. It takes many fewer people to run many HFT firms than to run one JPM prop trading floor which is the actual alternative.

I agree that it's a waste of talent and money, but how is it evil?

by omellet 11y ago

I agree that it's a waste of talent and money, but how is it evil?

It's an excellent example of the middleman that only extracts money from a system, that adds no value to the system. They insert themselves into the transactions where they can siphon off very small amounts of money over a very large number of transactions. Nobody benefits but them from what they're doing, no one walks away with something in their hands or brains by their actions. It's legal, but it isn't right or a good thing.

__d 11y ago
The counter argument is that they do provide a benefit, by providing liquidity and/or making price discovery more efficient. Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.
- Marazan 11y ago
  They cannot add liquidity. They HFT can only make money when there are slower traders willing to buy and sell. Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.
  - vasilipupkin 11y ago
    this is incorrect. HFT can make money adding liquidity to a market that erroneously is lacking in liquidity ( mispricing )
  - tptacek 11y ago
    Look at a market without market-makers. Housing is a good one. Houses sell only when there are "slow" traders willing to buy and sell. Have you ever bought or sold a house? Would you like the financial markets to be more like real estate?
    - Frondo 11y ago
      The alternative to HFT is not the real estate market. The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.
      - tptacek 11y ago
        The markets in the decades before HFT were crooked like a bucket of fish hooks! They were NOTORIOUSLY corrupt. Everyone was scamming everyone else. The entire market was a giant grift. Are you really sticking up for 1980s trading? Or have you just not done much research about how it worked?
        Frondo 11y ago
        Really? And now, with HFT, they're no longer crooked? If I remember right, in the 2000s we've seen a ton of crooked market scandals (fraudulently rated securities, LIBOR, etc etc). I don't see this relationship you're positing between HFTs and a non-corrupt trading market at all.
        tptacek 11y ago
        That's an illogical response.
        Frondo 11y ago
        You said: prior to HFTs the markets were corrupt, the entire market was a giant grift. You implied that, without HFT companies, we'd be right back there, though I see now that you didn't explicitly say exactly that.
        tptacek 11y ago
        For your argument to make sense, all forms of corruption would need to have a single cause, and all interventions to reduce corruption would need to impact all forms of corruption. That's nonsensical and not a point I'm willing to engage further with. I think we've pushed this thread far enough to the right margin of the page.
- Frondo 11y ago
  I don't think it's acrimonious to say that no, that liquidity is not beneficial to society as a whole. I struggle to see how any sector other than the financial sector would suffer if all trades happened once a second, or even once a minute. No process in the human world is going to change the value of a company quicker than that.
  - tptacek 11y ago
    It's not "acrimonious", it's just wrong. Liquidity keeps spreads narrow. Wide spreads are a tax paid by retail investors to a cabal of sell-side firms.
    - Frondo 11y ago
      We don't need the amount of liquidity the HFT people say they're providing. No one benefits but them. They're not adding value to society.
      - tptacek 11y ago
        So what's the RIGHT amount of tax we should be paying to commercial market-makers for the privilege of trading? The residential real estate market is gigantic, a demonstrably functional piece of the US economy. Maybe the stock markets should work more like the real estate market. Forget about liquidity. Who needs it? Instead, we'll just pay seven percent of every transaction to an "agent".
        Frondo 11y ago
        Good question! I don't have an answer to that. I do know that the markets survived just fine before the HFT companies came along, and now that they're here, I don't see society as a whole any better off for their presence. Maybe, without just saying "they provide liquidity" and leaving it at that, you can explain how the post-HFT world is better for anyone but the HFT companies?
        11y ago
kasey_junk 11y ago
> They insert themselves into the transactions Be very clear what you mean when you say this. Because the vast majority of the time when people talk about HFT, the only way the "insert themselves" into transactions is by acting as the counter party to one side of the transaction. In this context they add a lot of value to the system, they smooth the demand curves in time and take on some of the risks of warehousing supply.
- ConfuciusSay 11y ago
  The big claim with HFT is they "add liquidity", but there's evidence that shows the opposite. Indeed it seems like HFT's only add liquidity when it's already plentiful, but reduces liquidity when it's really needed. The Fed has said as much recently.
  - kasey_junk 11y ago
    > The big claim with HFT is they "add liquidity" I'm not sure who is making that claim, but I think what they are implying is that HFT "provides liquidity cheaper than the previous system of pit traders" or even "fragmentation of exchanges has dramatically brought down exchange fees at the cost of added complexity for liquidity providers (and possibly liquidity consumers). Only HFT systems could have cheaply dealt with this new complexity". In any case, I'd sum it up as "it is cheaper to trade now after the rise of HFT than at any other time, at least some of that is because they can market make more efficiently than a dude in a vest". Vanguard for one agrees with me (http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...). What many critics have claimed is that this has come at the cost of an increase in volatility, especially in the form of flash crashes and it is unclear as of yet if that is better/worse than the traditional liquidity crunches we saw under the previous regime and still see in markets not dominated by HFT. The Fed was specifically talking about this in the context of treasury bond (and futures) volatility and a skeptic might wonder which is more likely to have caused volatility in the treasury markets, HFT or unprecedented fed monetary policy. None of which is germane to the question of what the OP meant when he said that HFT insert themselves into transactions.

jegutman 11y ago

Also the waste of talent argument is a red herring. People who say that assume the alternative is no financial system in their heads. It takes many fewer people to run many HFT firms than to run one JPM prop trading floor which is the actual alternative.