tag:blogger.com,1999:blog-17232051.post8748228845336319019..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: No one really knows if HFT is good or badNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger69125tag:blogger.com,1999:blog-17232051.post-54028491946853029722014-04-16T03:50:41.946-04:002014-04-16T03:50:41.946-04:00I have lot of qualitative posts at your blog, and ...I have lot of qualitative posts at your blog, and this being one of them .<br /><br /><br /><br /><a href="https://www.igel.com/uk/" rel="nofollow">Thin Client Hardware</a> & <a href="https://www.igel.com/uk/products/igel-zero-clients.html" rel="nofollow">Zero Client</a><br /><br /><br /><br />Anonymoushttps://www.blogger.com/profile/03604028957926441970noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-34137315002861884412014-04-13T23:53:32.804-04:002014-04-13T23:53:32.804-04:00High Frequency Trading, also known as High Speed T...High Frequency Trading, also known as High Speed Trading.<br /><br />It's a scheme for front-running orders by intercepting other people's orders before they hit the market.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88189736070602685622014-04-13T23:52:14.623-04:002014-04-13T23:52:14.623-04:00It's worth noting that the obnoxious and illeg...It's worth noting that the obnoxious and illegal front-running skimming by HFTs is widely considered to be one of the reasons why many traders are dropping out of the market entirely and heading to harder-to-scam fields such as direct purchase of land.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-83141525247502856582014-04-13T23:46:34.508-04:002014-04-13T23:46:34.508-04:00In contrast to the benefits from parasites, there ...In contrast to the benefits from parasites, there is no benefit to HST.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73299641940637793602014-04-13T23:45:43.201-04:002014-04-13T23:45:43.201-04:00Most of HST is front-running.
Front-running is il...Most of HST is front-running.<br /><br />Front-running is illegal and has already been proven to be bad.<br /><br />Therefore most of HST is bad.<br /><br />QEDNathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19349241250564257592014-04-10T19:54:48.290-04:002014-04-10T19:54:48.290-04:00It's an interesting and good point about natur...It's an interesting and good point about natural monopolies. <br /><br />Of course, there has been off-the-floor trading in stocks, for a variety of reasons, that gives a lot of market power to the big brokers/banks.<br /><br />Nevertheless, if someone had said "competitive market makers" 20 years ago, I'd guess that most would have thought most easily of more competition on a single platform or two, rather than a proliferation of exchange venues / definitions that we've seen.<br /><br />Although perhaps supportive of HFT, one doesn't need to be agnostic. There are and can be trading that we'd classify as manipulative market practice. If I'm not mistaken, there was a time when 'cornering the market' was not illegal, no? <br /><br />My personal read is that a number of people thought that automating trading would lead to a cleaner market than the old-boy way. It looks like it has been a wake up call to the expectations of some and the conscience of others to find that "trading" can bring out the worst in people. Or, if that is too harsh, make them short-sighted in any number of ways.<br />Friendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47834017524015384142014-04-10T19:21:04.385-04:002014-04-10T19:21:04.385-04:00Thanks for your comments!
Three things come to ...Thanks for your comments! <br /><br />Three things come to mind.<br /><br />1. We've had a long tradition of letting the markets be studied, at least the public exchanges. It seems risky to give that up entirely. After all, we've uncovered mischief by doing it. The NASDAQ bid-ask bru-ha-ha comes to mind.<br /><br />2. We ought to have an objective measure of the cost of the type of price discovery you describe. The word "sooner" in your statement means everything when it comes to conceptualizing the impact of speed on ... "fair trade". Does it mean blaze around and buy up liquidity so it can be sold back to a seeker of it? Does it mean move your mkt-maker price up higher and faster than others in anticipation of a big buy order? Does it mean using sly order types to limit your risk of adverse selection? <br /><br />3. Also, we should look at the cost of smaller amounts, in another way, because it seems to have lead to market fragmentation, possibly. One impact seems to be flight of larger players as they figure out that they'd rather be at the proverbial high-stakes table, the one where buyers and sellers are pre-qualified, so that they know they can sell 250,000 shares at a clip, if there is a buyer.Friendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90244694721845130472014-04-09T22:47:24.905-04:002014-04-09T22:47:24.905-04:00No, the burden of proof is absolutely *not* on HFT...No, the burden of proof is absolutely *not* on HFT guys. There is no evidence *at all* to think that HFT is bad, parasitic, or unfair. The criticisms that unprincipled dicks like Lewis are spewing are nonsense.Piyohttps://www.blogger.com/profile/05775346125247800627noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-67849570740238956732014-04-09T19:50:37.378-04:002014-04-09T19:50:37.378-04:00I agree with the position that the burden of proof...I agree with the position that the burden of proof is on the HFT folks. From what I gather from the press and the blogosphere, many of the various mechanisms under the general rubric of HFT have zero transparency. Isn't a key feature of an exchange that the rules are clear to all participants? Lewis indicates that even major retail brokers like Vanguard and Fidelity were in the dark. If this is a benign or advantageous feature, wouldn't the stock exchanges be advertising it to all users? If we really don't know how it works, how do we ensure that market stability will be maintained, a scant seven years after the last crash? Sorry, not buying it.<br /><br />(reposting after minor editing)On twitter as @rjhomer57https://www.blogger.com/profile/09341331950105845067noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71006981276674784572014-04-09T19:10:40.460-04:002014-04-09T19:10:40.460-04:00This comment has been removed by the author.On twitter as @rjhomer57https://www.blogger.com/profile/09341331950105845067noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28580032142730534412014-04-09T13:27:34.468-04:002014-04-09T13:27:34.468-04:00This is the benefit that HFT are suggesting. They ...This is the benefit that HFT are suggesting. They are forcing investors to participate more often and thus reveal their information to the market sooner and in smaller amounts. As the information is integrated into the price by inducing the trade the HFT take a cut of the difference to compensate them or their services.Unknownhttps://www.blogger.com/profile/13305124836711242805noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-81227160975756423592014-04-09T13:23:52.536-04:002014-04-09T13:23:52.536-04:00Yes it is. There is some study out there that the ...Yes it is. There is some study out there that the explosion of allergies out there is directly related to our ability to eliminate parasites in the developed world. The argument goes that humans evolved their immune systems to deal with parasites. Most parasites suppress immune response and humans evolved greater immune responses to counteract the effect. If you eliminate the parasites that basically all humans had you are left with a very reactive immune system that now reacts to non-dangerous environmental factors. It may be better to actually have certain parasites in the long run because in responding our body is actually in a symbiotic equilibrium. Of course this is all in balance because severe infections are certainly deadly especially with other pathogens. The same could be suggested of the markets. Sometimes knowing a little is worse than ignorance. When western doctors started to give iron supplaments to tropical populations to allieviate endemic anemia it worked. It also made them fantastic hosts for malaria and caused tens of thousands of deaths more than the anemia ever did although most anemia deaths are horrific in that they are often women in childbirth.Unknownhttps://www.blogger.com/profile/13305124836711242805noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-83596533952281767292014-04-09T09:40:24.700-04:002014-04-09T09:40:24.700-04:00I highly encourage you to think about this in a di...I highly encourage you to think about this in a different dimension: Market making and liquidity pools are natural monopolies. Traders tend to gravitate to deep liquidity pools. Kinda like Facebook - who wants to be the only guy on Facebook? Similarly, nobody wants to be the only one in a market. The bigger you are (e.g. Fidelity) the more you value deep markets. Once a market maker has a critical mass of liquidity and customers, it is very hard to knock them down. Very high barriers to entry. <br /><br />It does not matter whether the expenditure is "wasteful" - what matters is who accrues the benefit of innovation. Does it reinforce the natural oligopolistic structure of the market, or does it break it down and make it more competitive? "front running" by a computer program distributes demand across several pools of liquidity, reducing any particular market makers "hold" on a critical mass of liquidity. Is it easy or hard to enter the market with a new strategy? <br /><br />"Volatility" in individual names is driven in part by sudden demand facing a fixed short term supply curve. "Volatility" in something like the S&P index is driven by macro factors. In my simple mind you can boil down informational asymmetry and diffusion into the elasticity of the short term supply curve. <br /><br />reinforcement of high barriers to entry and an oligopolistic structure will increase volatility by decreasing the elasticity. Decreasing barriers makes the supply curve more elastic. <br /><br />All this pursuit of this or that HFT strategy is interesting, but seems to miss the salient point that market making itself is a natural monopoly. I do not know if HFT is good or bad because no one has told me the effect on market structure and who is accruing the benefits. Finance people make a lot of money off rents. How is this affecting the ability of finance people to collect rents in market making?dwbhttps://www.blogger.com/profile/02799793864068767226noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53576730002846197962014-04-09T03:35:07.663-04:002014-04-09T03:35:07.663-04:00meh
After a week of poking around with this stuff...meh<br /><br />After a week of poking around with this stuff, here's an alternative view:<br /><br />The key parts of "HFT" insofar as they are related to market-making events are pretty simple. In fact, if you understood how CDOs got made and leveraged, when that longstanding opacity was finally widely laid bare after the fact (to all our economic chagrin...), it's probably a LOT simpler than that.<br /><br />Yeah, the mathematics might be complicated, but the basic intuition about what is going on is simple. <br /><br />The real "complexity" comes in other ways, mostly non-theoretical practitioner-savvy ways, such as the implementation the algo across multiple markets for the same stock (latency arbitrage and so forth) and in the inducements and quiet facilitations from "friendly" exchanges and brokers, and in the ancillary/supporting strategies (quote stuffing, tape painting, searching, purchase and segregation of order flow). <br /><br />Of course, the computer skills at this level of desired speed and volume are sizable, but those seem to be a specialty, a complexity that is not required for full understanding, apart from savvy risk control.<br /><br />2-centsFriendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62559068283192553252014-04-09T03:20:08.847-04:002014-04-09T03:20:08.847-04:00about that hope for more research:
from Flashboys...about that hope for more research:<br /><br />from Flashboys footnote:<br /><br />"In March 2013, the Commodity Futures Trading Commission, a derivatives regulator, ended its nascent program to give outside researchers access to market data after one of those researchers, Adam Clark-Joseph, of Harvard University, used the data to study the tactics of high-frequency traders. The commission shut down the research after lawyers for the Chicago Mercantile Exchange wrote the regulators a letter arguing that the data Clark-Joseph had collected belonged to the high-frequency traders, and that sharing it was illegal. Before he was booted out of the place, Clark-Joseph showed how HFT firms were able to predict price moves by using small loss-making stock market orders to glean information from other investors. They then used that information to place much bigger orders, the gains from which more than compensated for the losses."Friendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51926490754016590902014-04-07T16:29:03.893-04:002014-04-07T16:29:03.893-04:00Hi Noah,
You are most likely quite right about the...Hi Noah,<br />You are most likely quite right about the observation that nobody really understands what HFT is all about. Including the HFT guys. <br /><br />I get the feeling sometimes that the closest analogy that I can come up with, is the fictional (?) thief who manages to clip 1c from everybody's regular paycheck and goes un-noticed. For a while anyway.Som Dasguptahttps://www.blogger.com/profile/11848089230329819807noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91961635141679261882014-04-07T12:35:44.701-04:002014-04-07T12:35:44.701-04:00If there is a social good in HFT, don't you th...If there is a social good in HFT, don't you think that HFT would be able to express it to defend themselves?<br /><br />Parasites may do some good. Is that reason to tolerate parasites?bakhohttps://www.blogger.com/profile/16472764185459425186noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66312142594630408162014-04-07T12:03:33.698-04:002014-04-07T12:03:33.698-04:00Well, let's hope we all don't end up in a ...Well, let's hope we all don't end up in a legalese dead-end on "front running" and "skimming". God knows, this "it was all legal" meme is certainly popping up, maybe interrupting the real conversation about market integrity.<br /><br />Elsewhere I talked about everyone conceptually trying to come to grips with the pitfalls of speed (yes, pitfalls - it's not all goodness).<br /><br />In the situation you describe, making use of a high-theory name "information leakage", what is happening is that speed has turned the market maker, usually price taker, into a price maker. <br /><br />This interrupts our basic sense of fairness. It just does. To illustrate, you show up at the counter to check-out with your clothes, and the check-out clerk looks at all you have and says, "okay the first three are at the marked price and the next few, well, I know we said we'd sell them to you at the marked price, but we'd like a little more please, not too much, just let's split the difference between the price we offered to sell them and what you can get across the street at another retailer, okay? I know you don't like that, but, trust me, it's really better for everyone this way, especially those who come through with just one or two things to buy."<br /><br />Speed also has an impact on our concepts in other ways. For example, true or false: superior speed plus "information leakage" has the net result of turning a market order into a limit order of sorts, which can in turn be conceptualized as an option. That is, speed (or certain information advantages) can turn an order into something like an option.<br /><br />I have to think about that some more, but it's food for thought, no?Friendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87130625364008111742014-04-07T11:46:55.732-04:002014-04-07T11:46:55.732-04:00I do not, since it comes from lectures given by a ...I do not, since it comes from lectures given by a prof here at Stony Brook. But I will try to get you some better info.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25390096643677727312014-04-07T11:45:11.548-04:002014-04-07T11:45:11.548-04:00When you do not observe the results you expect fro...When you do not observe the results you expect from *enormous* scale economies, like electronic trading, it bears further investigation, no?<br /><br />Here is the best graphic I've see so far on order execution that also gives a picture of market structure / topology:<br />http://www.businessweek.com/graphics/zoomify/inv_07trade52.html<br /><br />I'm not going to take the conversation too far afield, although this original post is highly theoretical in its tenor. To that end, why do so many assume that competition is a good thing for every circumstance? <br /><br />Afterall, pure competition leads to zero economic profits and, quite often, creates quality offerings so low, in some parts of the markets or more widespread, that we recoil at them and their practices. <br /><br />And there are plenty of unfair competitive practices, like dumping and buying market share. Could an upstart exchange compete unfairly to get market share?<br /><br />In the digital age, information is incredibly valuable, information about market participants and their holdings and behaviors. Let's say it is so valuable that bid-ask is no longer a meaningful measure of anything, just a residual of a days-gone-by approach to selling, dealing, brokering a market for financial stocks. Let's theorize that, like other enterprises, there is and will be a consolidation of the economic "power of information" into the hands of a few that has vast implications for how we trade and perceive the fairness of trade way down the road (not just stocks, but all economic transactions, including such practices as first-degree price discrimination in a market for goods and services). <br /><br />Against that consideration of a march toward 'information consolidation', what does it mean, in the digital age, to create an "informationally competitive market"? Can it be done?Friendsterhttps://www.blogger.com/profile/05979689345903427943noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30299832942208343282014-04-07T08:51:20.289-04:002014-04-07T08:51:20.289-04:00Do you have further information on the existence o...Do you have further information on the existence of "deep mathematical (information-theoretical) reasons to suspect that lots of HFT opportunities can only be exploited by those who are willing to remain forever ignorant about the reason those"?Davidhttps://www.blogger.com/profile/05346677616875861075noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-322407624910206232014-04-07T05:48:12.911-04:002014-04-07T05:48:12.911-04:00I came to economics with a humanities background, ...I came to economics with a humanities background, so forgive me, but.... it continues to amaze me how much brain power is being spent on making money out of nothing. If Michael Lewis is oversimplifying HFT, then this post seems to overcomplicate it. I can find no benefit in traders acting more on instinct or "patterns" they might see but don't understand or in holding positions for just a couple of seconds or even less. Long-term investors, or value investors believe in their investment, that's why it's called investment... HFT is just exploiting arbitrage opportunities. About liquidity... on balance, liquidity increases prices, at least central banks seem to think so. I do think that higher prices indicate the health of an economy, provided that this implies that society in general is wealthier. But I'm not sure if this is the case with HFT which is more a tool of already rich people to get even richer.<br />There are "simple" reasons why HFT might be bad, but there are no simple reasons why HFT might be good.Alexander Sebastian Schulzhttps://www.blogger.com/profile/15135338616598357444noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-2463764291970980632014-04-07T05:24:33.573-04:002014-04-07T05:24:33.573-04:00Early algorithms were constrained by inability to ...Early algorithms were constrained by inability to trade fast, then faster, then fasterer! HFT was the techno solution to initially support the algorithms, but now these two are so badly entangled that one can not separate. <br /><br />Buy and hold is an algorithm that does not need HFT! PKINVSThttps://www.blogger.com/profile/02207215353806932473noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88781678015606471062014-04-07T05:24:04.602-04:002014-04-07T05:24:04.602-04:00Beat the market - let your house cat invest?
htt...Beat the market - let your house cat invest?<br /><br />http://unriskinsight.blogspot.co.at/2013/09/beat-market-let-your-house-cat-robot.html<br /><br />about naive "algorithmic" trading.Herbert Exnerhttps://www.blogger.com/profile/05379855380552452430noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65820812955077645422014-04-07T02:51:38.523-04:002014-04-07T02:51:38.523-04:00Correction: "To sum up: There is very, very l...Correction: "To sum up: There is very, very little that we know about HFTs" should read: "To sum up: there is very, very little that I, Noah Smith, know about HFT."<br /><br />Thank you for your attention.Ray Lopezhttps://www.blogger.com/profile/11134761834999705305noreply@blogger.com