Should High-Frequency Trading Be Banned?(freakonomics.com)
freakonomics.com
Should High-Frequency Trading Be Banned?
http://www.freakonomics.com/2011/03/28/should-high-frequency-trading-be-banned-one-nobel-winner-thinks-so/
10 comments
So they should have a very small fee for orders as well, proportional to its actual cost, but not high enough to dissuade people experimenting with pricing as long as they don't cost other people anything.
Typically there is a (very low) order fee - off the top of my head, I'm not sure if it's levied by the broker or matching engine.
There is also a limit on the number of orders one can place. Your broker will typically demand fill rates of at least 0.5-1% and will impose limits on the number of orders you can place in a rolling window.
There is also a limit on the number of orders one can place. Your broker will typically demand fill rates of at least 0.5-1% and will impose limits on the number of orders you can place in a rolling window.
Not in my experience. Most HFT shops only pay if an order fills; and if they are adding liquidity to stocks, they get a rebate.
If your messages/fills ratio gets REALLY wacky, the exchange might complain.
If your messages/fills ratio gets REALLY wacky, the exchange might complain.
Exactly. HFT disempowers market makers b/c all those orders create extra liquidity with worse spread for market makers.
The anti-HFT sentiment is similar to the opposition to electronic exchanges and demands that all pricing be centrally routed -- the old school exchanges realize they have a sweet deal and so they try to fight off other sources of trades/liquidity/pricing.
The anti-HFT sentiment is similar to the opposition to electronic exchanges and demands that all pricing be centrally routed -- the old school exchanges realize they have a sweet deal and so they try to fight off other sources of trades/liquidity/pricing.
You are confused. Most HFT shops are market makers.
Technically you're correct, but I was referring to the traditional market making firms who buy seats on exchanges to do business in a handful of stocks.
ok, I understand your point. I think we agree that the HFT firms tightening spreads is good for consumers.
I know a way people suffer because of HFT - the flash crash(es). Should the market fall, the HFT leave the scene. Joe Consumer suddenly finds that he has no one on the other end of the trading counter. The market is essentially an illusion. http://en.wikipedia.org/wiki/2010_Flash_Crash
The discussion page is actually quite interesting, and makes for an educational thread in itself.
Short summary - HFT left the table after creating a mess. A large sale in e-minis started a trading pattern between where algorithms kept trading back and forth between each other, causing the prices to drop. After a point there was No liquidity and stub trades, which were never supposed to see the light of day, got executed. This resulted in some stocks going for a dollar, while others for many times market value. Sometime after this markets trading was brought to a halt and the regulators stepped in. A large portion of the trades made were nullified. Effectively the markets were reset, order was restored manually, before it was brought back online. At this point the market returned to equilibrium and started recovering.
From the Wikipedia article, the SEC report on HFT is below:
Impact of High Frequency traders: Regulators found they exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines as they sold aggressively to eliminate their long positions and as they withdrew from the markets in the face of uncertainty.[8][9][10][11] Other theories postulate that the actions of high frequency traders (HFTs) was the underlying cause of the flash crash. One hypothesis, based on the analysis of bid-offer data by Nanex, Llc., is that HFTs send non-executable orders (orders that are outside the bid-offer spread) to exchanges in batches. Though the purpose of these orders is unknown, some experts speculate that their purpose is to increase noise, clog exchanges, and outwit competitors.[26] However, other experts believe that deliberate market manipulation is unlikely because there is no practical way in which the HFTs can profit from these orders, and it is more likely that these orders are designed to test latency times and to detect early price trends.[27] Whatever the reasons behind the possible existence of these orders, this theory postulates that they exacerbated the crash by overloading the exchanges on May 6.[26][27] On September 3, 2010 the regulators probing the crash concluded: "that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil." [28] Some have put forth the theory High-frequency trading actually have been a major factor in minimizing and reversing the flash crash.[29]
Do note that the person defending the HFT is a HFT trader himself - Jim Simons of quantitative hedge fund Renaissance Technologies. His contention is that HFT saved the day by brining liquidity back. I think this claim is simply wrong and his motivations dubious at best. If no HFT funds were there, and this had to be manually checked, the flash crash would not have happened.
They have since added circuit breakers to the exchange to prevent re-occurrences.
Short summary - HFT left the table after creating a mess. A large sale in e-minis started a trading pattern between where algorithms kept trading back and forth between each other, causing the prices to drop. After a point there was No liquidity and stub trades, which were never supposed to see the light of day, got executed. This resulted in some stocks going for a dollar, while others for many times market value. Sometime after this markets trading was brought to a halt and the regulators stepped in. A large portion of the trades made were nullified. Effectively the markets were reset, order was restored manually, before it was brought back online. At this point the market returned to equilibrium and started recovering.
From the Wikipedia article, the SEC report on HFT is below:
Impact of High Frequency traders: Regulators found they exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines as they sold aggressively to eliminate their long positions and as they withdrew from the markets in the face of uncertainty.[8][9][10][11] Other theories postulate that the actions of high frequency traders (HFTs) was the underlying cause of the flash crash. One hypothesis, based on the analysis of bid-offer data by Nanex, Llc., is that HFTs send non-executable orders (orders that are outside the bid-offer spread) to exchanges in batches. Though the purpose of these orders is unknown, some experts speculate that their purpose is to increase noise, clog exchanges, and outwit competitors.[26] However, other experts believe that deliberate market manipulation is unlikely because there is no practical way in which the HFTs can profit from these orders, and it is more likely that these orders are designed to test latency times and to detect early price trends.[27] Whatever the reasons behind the possible existence of these orders, this theory postulates that they exacerbated the crash by overloading the exchanges on May 6.[26][27] On September 3, 2010 the regulators probing the crash concluded: "that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil." [28] Some have put forth the theory High-frequency trading actually have been a major factor in minimizing and reversing the flash crash.[29]
Do note that the person defending the HFT is a HFT trader himself - Jim Simons of quantitative hedge fund Renaissance Technologies. His contention is that HFT saved the day by brining liquidity back. I think this claim is simply wrong and his motivations dubious at best. If no HFT funds were there, and this had to be manually checked, the flash crash would not have happened.
They have since added circuit breakers to the exchange to prevent re-occurrences.
You are malinformed.
Only some of HFT left the table. The ones that stayed at the table helped it come back from the crash. And came out ahead.
Only some of HFT left the table. The ones that stayed at the table helped it come back from the crash. And came out ahead.
Could you elaborate? It would definitely be interesting to read your take.
A few questions -
A key reason the system crashed was the removal of liquidity. If HFT were still present to build liquidity, then how did the crash still proceed?
Also, how did the ones which stayed at the table help? What did they do pre-market stabilization? They key assistance would have been to halt the hot-potato trade and no one was able to do that. Post stabilization everyone returned to normal, so I am discounting any efforts after that point.
Further, if they did they come out ahead, how did they manage that? Many trades were rendered void once the markets were returned to normal, so how did they avoid that outcome?
If they came out ahead, wouldn't that also imply that they got their shorts correct? Which means they profited from a one time occurrence? (Discounting post intervention behavior, at which point everyone is back to normal)
A few questions -
A key reason the system crashed was the removal of liquidity. If HFT were still present to build liquidity, then how did the crash still proceed?
Also, how did the ones which stayed at the table help? What did they do pre-market stabilization? They key assistance would have been to halt the hot-potato trade and no one was able to do that. Post stabilization everyone returned to normal, so I am discounting any efforts after that point.
Further, if they did they come out ahead, how did they manage that? Many trades were rendered void once the markets were returned to normal, so how did they avoid that outcome?
If they came out ahead, wouldn't that also imply that they got their shorts correct? Which means they profited from a one time occurrence? (Discounting post intervention behavior, at which point everyone is back to normal)
First, as I read the report, the system ran out of liquidity due to a large Program Trading dump of a particular kind of security. Note that Program Trading is not HFT.
Some HFT firms are designated market makers at the large exchanges. They are required to always be in the market, and are paid by the exchange a fee for each trade accomplished. So if they make nothing on the trade, they come out ahead. So big volume for them leads to income. Further, if they can make a profit on the trade, that is theirs to keep.
For big HFT firms, the average time that they hold instruments is, well, zero. So they are not concerned about position. They are contractually obligated to always be in the market, providing liquidity.
Some HFT firms did back out when it looked really bad (clearly not designated liquidity providers) and lost out on the opportunity to help.
Some HFT firms are designated market makers at the large exchanges. They are required to always be in the market, and are paid by the exchange a fee for each trade accomplished. So if they make nothing on the trade, they come out ahead. So big volume for them leads to income. Further, if they can make a profit on the trade, that is theirs to keep.
For big HFT firms, the average time that they hold instruments is, well, zero. So they are not concerned about position. They are contractually obligated to always be in the market, providing liquidity.
Some HFT firms did back out when it looked really bad (clearly not designated liquidity providers) and lost out on the opportunity to help.
Absolutely, and all traders should be required to use rotary dial phones to even the playing field further. While we're at it, speaking into the phone at faster than 200 words per minute should also be banned.
I'm leery of HFT, but not out of concern of a level playing field. Consider a market for some commodity. Start with the simplest market--people who produce the commodity sell directly to those who use it. Let's also assume external factors that affect the supply and demand for the commodity are stable over a long period of time.
After a number of transactions have been done, and the information about these has spread among the buyers and sellers, the market should converge on some price for that commodity, which will then be stable.
When some real world event happens that affects supply (a late snow wipes out newly planted crops, for instance) or demand (Justin Bieber turns vegetarian causing millions of teen girls to give up meat), the market will adjust to a new price.
A key thing to note here is that the price depends on real world events and the knowledge the actual produces and consumers of the good have of those events.
Now introduce intermediaries who trade in the commodity, but do not product it or consume it. They speed up the rate of transactions, and help the flow of price information, and so arguable help the market settle on the correct and stable price--basically the price you'd have in the direct market adjusted to take into account the increased transaction cost of having an intermediary.
Since the correct price economically ultimately depends on the factors that affect supply and demand (the weather, Justin Bieber, and so on), my concern is that if trading by intermediaries becomes too fast you can get to a point where the price is not being driven by the real world factors, but rather by traders reacting to other traders.
In other words, could HFT make the feedback loops that allows a market to set prices too strong? Feedback as a control mechanism in general is a good and useful thing, but too much feedback and it can become self sustaining, and the output of the system depends less on external inputs than it should (or even not at all).
Until there's solid analysis showing that HFT can't lead to the bad kind of feedback, I'd rather see it approached cautiously.
After a number of transactions have been done, and the information about these has spread among the buyers and sellers, the market should converge on some price for that commodity, which will then be stable.
When some real world event happens that affects supply (a late snow wipes out newly planted crops, for instance) or demand (Justin Bieber turns vegetarian causing millions of teen girls to give up meat), the market will adjust to a new price.
A key thing to note here is that the price depends on real world events and the knowledge the actual produces and consumers of the good have of those events.
Now introduce intermediaries who trade in the commodity, but do not product it or consume it. They speed up the rate of transactions, and help the flow of price information, and so arguable help the market settle on the correct and stable price--basically the price you'd have in the direct market adjusted to take into account the increased transaction cost of having an intermediary.
Since the correct price economically ultimately depends on the factors that affect supply and demand (the weather, Justin Bieber, and so on), my concern is that if trading by intermediaries becomes too fast you can get to a point where the price is not being driven by the real world factors, but rather by traders reacting to other traders.
In other words, could HFT make the feedback loops that allows a market to set prices too strong? Feedback as a control mechanism in general is a good and useful thing, but too much feedback and it can become self sustaining, and the output of the system depends less on external inputs than it should (or even not at all).
Until there's solid analysis showing that HFT can't lead to the bad kind of feedback, I'd rather see it approached cautiously.
I think your argument is essentially an argument against speculation. All of the fears you cite apply equally to any form of speculation.
The problem is, many things count as speculation -- a farmer who produces a commodity buying insurance against a poor crop is ultimately a futures contract.
The way I think of HFT is that it's like increasing the fidelity of a recording from 11 kilohertz to 44.1 kilohertz. There are a lot more intermediate data points, but the underlying rationality (or irrationality) of pricing trends will be the same.
Before HFT, it was more likely that a bid/ask spread would be higher ... reflecting the risk aversion of the market making firm... With HFT, that spread decreases b/c the liquidity is offered as part of a small timeframe strategy which may or may not pay off.
If you weren't concerned with that short timeframe, then it makes no difference to you whether your order was filled by one party (a traditional market maker) or 100 parties (each a different HFT algorithm).
I think to assuage your fear I'd probably just say that it's very difficult to move large numbers of shares at a price that's all that different from the previous price... So any HFT algorithm will necessarily be dealing either with largely uncontroversial prices or very small share volumes.
Considering that, I think the overall risk of rogue algorithms leading to a harmful feedback loop is not significantly increased by HFT, and HFT was mostly a scapegoat in the recent crash.
The problem is, many things count as speculation -- a farmer who produces a commodity buying insurance against a poor crop is ultimately a futures contract.
The way I think of HFT is that it's like increasing the fidelity of a recording from 11 kilohertz to 44.1 kilohertz. There are a lot more intermediate data points, but the underlying rationality (or irrationality) of pricing trends will be the same.
Before HFT, it was more likely that a bid/ask spread would be higher ... reflecting the risk aversion of the market making firm... With HFT, that spread decreases b/c the liquidity is offered as part of a small timeframe strategy which may or may not pay off.
If you weren't concerned with that short timeframe, then it makes no difference to you whether your order was filled by one party (a traditional market maker) or 100 parties (each a different HFT algorithm).
I think to assuage your fear I'd probably just say that it's very difficult to move large numbers of shares at a price that's all that different from the previous price... So any HFT algorithm will necessarily be dealing either with largely uncontroversial prices or very small share volumes.
Considering that, I think the overall risk of rogue algorithms leading to a harmful feedback loop is not significantly increased by HFT, and HFT was mostly a scapegoat in the recent crash.
This is already the case - see your garden variety bubble. Human beings create similar loops with speculation and lack of fact checking.
Fact checking is harder still, if you are stuck in herd behavior. It takes quite a bit to take the risk of standing against the crowd, especially when they seem to be making hand over fist by following the new mantra.
Fact checking is harder still, if you are stuck in herd behavior. It takes quite a bit to take the risk of standing against the crowd, especially when they seem to be making hand over fist by following the new mantra.
This is some kind of reverse slippery slope argument that just doesn't hold up to common sense.
Care to explain or should I just take your word for it?
I feel like the burden of "explaining" should be on the person who made the slippery slope argument. The linked articles give arguments why HFT is harmful. You didn't really add anything to that discussion except to mock it, so I feel like the ball is still in your court.
In my opinion, the hand waving happens when people associate the "flash crash" with HFT in particular. Algorithms may have behaved as designed, but a lot of humans panicked. Yes, this panic led to some people losing money, so obviously any smart algorithm designer would build in some common sense controls. There is no reason to believe that it was only HFT algorithms that dealt poorly with the panic scenario.
If a group was proposing that residential areas have a speed limit, and you came back with "ah, and only horse-drawn-buggies should be allowed", that would seem rather irrelevant remark, yes? It would be rather beside the point and couldn't really defeat the proposal due to not actually talking about it.
Said another way, the first comment appears to be an attempt at a reductio ad absurdum on banning HFT, however, it does not establish that the absurd conclusion is a clear, logical extension of the position advanced by the other side.
Said more in line with how I interpret the previous criticism, you wanted it to be obvious that the other side is on a slippery slope. However no such slope exists; common sense allows for at least one clear stopping point between the actual proposal and your "we've slipped down into absurdity" zone.
Said another way, the first comment appears to be an attempt at a reductio ad absurdum on banning HFT, however, it does not establish that the absurd conclusion is a clear, logical extension of the position advanced by the other side.
Said more in line with how I interpret the previous criticism, you wanted it to be obvious that the other side is on a slippery slope. However no such slope exists; common sense allows for at least one clear stopping point between the actual proposal and your "we've slipped down into absurdity" zone.
Suppose someone claimed that residential broadband speeds should be capped at 14.4 kilobits per second b/c some teenagers download songs songs with inappropriate lyrics. The reader is supposed to believe that lowering the speed is a good thing just because the reader is assumed to believe that inappropriate lyrics are a bad thing.
Prices are not "good" or "bad". Most of the people who oppose HFT are very much in the habit of attributing aesthetic descriptions to prices and to trading patterns.
In my opinion, this is a naive view of markets and complex systems that leads to the false expectation of stability, etc.
Prices are not "good" or "bad". Most of the people who oppose HFT are very much in the habit of attributing aesthetic descriptions to prices and to trading patterns.
In my opinion, this is a naive view of markets and complex systems that leads to the false expectation of stability, etc.
I interpret this comment to be an entirely new line of criticism of the HFT ban. This one is based on an assessment of the applicability of the motivations behind the ban, the previous one was an attempted reductio. The polite thing for you to do would be to admit that your first criticism failed, or mark in some other way that you are starting a new line, not for you to speak as if you are simply backing that first criticism up with new information.
As for the new point, your example of absurdity includes a solution that is obviously decoupled from the problem it is stated to be addressing (download speed and lyrical content), that is why it is absurd. However you have not shown that the HFT ban is similarly unrelated to the problem(s) that it is intended to be addressing. The length of delays on feedback loops in control systems is very related to the performance of those control systems. Thus, the absurdness is not conveyed over of the HFT ban idea.
As for the new point, your example of absurdity includes a solution that is obviously decoupled from the problem it is stated to be addressing (download speed and lyrical content), that is why it is absurd. However you have not shown that the HFT ban is similarly unrelated to the problem(s) that it is intended to be addressing. The length of delays on feedback loops in control systems is very related to the performance of those control systems. Thus, the absurdness is not conveyed over of the HFT ban idea.
I think there is an analogy in my second comment that you have missed.
Download speed and lyrical content are just as connected as the speed of subsequent trade execution and psychological market meta-phenomena.
I chose the example of lyrics b/c they are purely subjective, just as most of the phenomena that HFT opponents cite as bad.
It's ultimately an aesthetic argument that you're making.
Download speed and lyrical content are just as connected as the speed of subsequent trade execution and psychological market meta-phenomena.
I chose the example of lyrics b/c they are purely subjective, just as most of the phenomena that HFT opponents cite as bad.
It's ultimately an aesthetic argument that you're making.
I didn't miss the analogy, I simply didn't find it a valid one. Nor did you present a reason for so considering it. You just gave the analogy, and assumed I should go along with the presuppositions that led to your thinking it is valid. If you want me to think the HFT ban is disconnected from the problems it is intended to address, you need to argue that position, not just make fun of how disconnected you think they are.
> "It's ultimately an aesthetic argument that you're making."
I don't think so. If you want to call something like 'signal chains should carry the information they are used to carry with an ignorably low noise floor' an aesthetic judgment, I guess you can. But it is more commonly thought of as a far more practical judgement than that. Turning up the speed up feedback signals is not radically decoupled from system performance, ergo your analogy to a situation that has such radical decoupling isn't valid.
> "It's ultimately an aesthetic argument that you're making."
I don't think so. If you want to call something like 'signal chains should carry the information they are used to carry with an ignorably low noise floor' an aesthetic judgment, I guess you can. But it is more commonly thought of as a far more practical judgement than that. Turning up the speed up feedback signals is not radically decoupled from system performance, ergo your analogy to a situation that has such radical decoupling isn't valid.
Fair enough. I apologize. I acknowledge that there were a lot of gaps in my argument, etc.
I will see if I can think of a concise way to articulate the argument and do so. Thanks for being willing to engage in some dialog.
I will see if I can think of a concise way to articulate the argument and do so. Thanks for being willing to engage in some dialog.
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I see your point, but it would be a pretty easy line to draw that traders need to hold stocks for more than a few seconds/minutes without disrupting much but the HFT aspect of the market right?
edit: or even that the trades must be ordered by a human. There are really easy dichotomies to draw here.
edit: or even that the trades must be ordered by a human. There are really easy dichotomies to draw here.
What good would that do?
Suppose we're looking at a world with one stock.
Suppose I have 100 hypotheses about that stock, each of which is relevant to some time frame. Some are hypotheses about the next few seconds, some are hypotheses about the next few minutes, hours, days, etc.
What is the harm of trying to execute trades to profit from those hypotheses? If there is no counterparty, none of the trades will go through regardless of their timeframe.
If there is a counterparty who decides (for example) to participate in several transactions with me over the span of several minutes (or seconds), we should assume that counterparty is self-interested and is making trades that satisfy its goals.
If on the other hand the counterparty is a firm whose algorithms and trading infrastructure was build in the 1990s and is somehow tripped up by my strategy, how is that any different from a lay investor being tripped up by a misinterpretation of (say) a low end of day closing price?
All market participants are either speculative or based on fundamentals. If you're the latter, you don't care much about the ultra short-term. If you're the former, then you have some strategy for speculation, which may take as input the behavior of other market participants.
In my view, since there is no reason why a rational strategy creator would prefer long term strategies to short term ones (expected risk adjusted returns being equal), there is no reason why HFT should be viewed with disdain. Much as computers replaced rotary phones on the trading floor, HFT is the next iteration of technological improvement in trading.
HFT happens to be a specialty area at present, but there's no reason that any adept speculator would avoid high frequency trades if she had sufficient algorithmic and tech sophistication to make them.
Suppose we're looking at a world with one stock.
Suppose I have 100 hypotheses about that stock, each of which is relevant to some time frame. Some are hypotheses about the next few seconds, some are hypotheses about the next few minutes, hours, days, etc.
What is the harm of trying to execute trades to profit from those hypotheses? If there is no counterparty, none of the trades will go through regardless of their timeframe.
If there is a counterparty who decides (for example) to participate in several transactions with me over the span of several minutes (or seconds), we should assume that counterparty is self-interested and is making trades that satisfy its goals.
If on the other hand the counterparty is a firm whose algorithms and trading infrastructure was build in the 1990s and is somehow tripped up by my strategy, how is that any different from a lay investor being tripped up by a misinterpretation of (say) a low end of day closing price?
All market participants are either speculative or based on fundamentals. If you're the latter, you don't care much about the ultra short-term. If you're the former, then you have some strategy for speculation, which may take as input the behavior of other market participants.
In my view, since there is no reason why a rational strategy creator would prefer long term strategies to short term ones (expected risk adjusted returns being equal), there is no reason why HFT should be viewed with disdain. Much as computers replaced rotary phones on the trading floor, HFT is the next iteration of technological improvement in trading.
HFT happens to be a specialty area at present, but there's no reason that any adept speculator would avoid high frequency trades if she had sufficient algorithmic and tech sophistication to make them.
This would probably increase transaction costs for the rest of the market.
If I can liquidate a position whenever I feel like it, I'm happy to provide liquidity even with a $0.01 spread. If you impose restrictions like "you must hold this stock at least 60 seconds even if it tanks", you have considerably increased my risk. Now I'll hold out for a $0.05-0.10 spread before I bother to offer liquidity.
This raises the cost for others to trade from $0.01/share to $0.05-0.10/share.
If I can liquidate a position whenever I feel like it, I'm happy to provide liquidity even with a $0.01 spread. If you impose restrictions like "you must hold this stock at least 60 seconds even if it tanks", you have considerably increased my risk. Now I'll hold out for a $0.05-0.10 spread before I bother to offer liquidity.
This raises the cost for others to trade from $0.01/share to $0.05-0.10/share.
Why can the banks have high-frequency trading, yet still not have instant transfers between accounts?
One creates directly attributable profits with little, if any, ongoing exposure. The other creates little, if any directly attributable profits.
Furthermore, if the transfer is from one bank to another, the sender wants to hold onto the funds for as long as possible to earn more interest.
Lastly, most retail banks probably still run ancient code that is not as conducive to innovation.
Furthermore, if the transfer is from one bank to another, the sender wants to hold onto the funds for as long as possible to earn more interest.
Lastly, most retail banks probably still run ancient code that is not as conducive to innovation.
Or a $.001 tax per transaction.
Let me begin by saying that I likely do not understand even half of what HFT is.
For me, they key part that I fail to understand is exactly what value HFT adds to non speculative market participants. The only explanation I've heard so far is that HFT adds "liquidity" to the market, but I don't get how. Let V be the value HFT adds to non speculative players.
If V is above zero, then allow HFT to continue. If V is zero or negative, my proposal would be not to ban HFT, but to restrict it to transactions made between HFT players. Then let them play in their casino all they want until one player is left. If this suggestion cannot be implemented because HFT needs the rest of the market to make profits, then I highly suspect that V is less or below zero and that HFT is really one of the Casino owners.
For me, they key part that I fail to understand is exactly what value HFT adds to non speculative market participants. The only explanation I've heard so far is that HFT adds "liquidity" to the market, but I don't get how. Let V be the value HFT adds to non speculative players.
If V is above zero, then allow HFT to continue. If V is zero or negative, my proposal would be not to ban HFT, but to restrict it to transactions made between HFT players. Then let them play in their casino all they want until one player is left. If this suggestion cannot be implemented because HFT needs the rest of the market to make profits, then I highly suspect that V is less or below zero and that HFT is really one of the Casino owners.
I don't get it. If the flash crash brought down the market drastically for 20 minutes, only to pull it back up, this only points to an opportunity for a more intelligent algorithm to be allowed to correct that and make money in the process. I can understand this as being an example of the state of the art being pretty dumb/gullible to multiplying its own noise, but I don't understand why this would be bad. Didn't the algos selling during the low and buying stocks later lose money?
Didn't the algos selling during the low and buying stocks later lose money?
Not necessarily, many trades were broken (mostly trades near the low).
If you sold low and bought halfway to the high, you probably made money since your sale was broken (but not the buy).
Not necessarily, many trades were broken (mostly trades near the low).
If you sold low and bought halfway to the high, you probably made money since your sale was broken (but not the buy).
So the problem was that the trades were broken, not HFT per se.
My main annoyance with HFT is that it clearly is a "game". A few times algorithms have misbehaved badly, whole blocks of trades have been rolled back.
Well, if the algos can make money they should also be allowed to lose money. How else would you have efficiency?
How about a tax on capital gains that is inversely proportional to the time the financial instrument is held?
The biggest cost HFT imposes on the world is the brain drain - there are so many super intelligent people working in the arms race that is electronic trading. Imagine if all of those smart people were doing something productive instead of helping people buy and sell options 1 microsecond faster.
The biggest cost HFT imposes on the world is the brain drain - there are so many super intelligent people working in the arms race that is electronic trading. Imagine if all of those smart people were doing something productive instead of helping people buy and sell options 1 microsecond faster.
I find the "talented people not fulfilling their potential" argument terrible. That's often cited as one of the costs of HFT, but its really true of a lot of human pursuits.
It just so happens that the prevailing sentiment is that finance, and HFT in particular are particularly immmoral, so its a popular notion; I find it as "bad" that hordes of talented engineers work on optimizing ad revenue for Google.
Humans will always be underemployed from some perspective ("Oh but she could be doing X"). Penalizing them for not operating in a way that is consistent with your (or anyone's) world view is far more sinister.
It just so happens that the prevailing sentiment is that finance, and HFT in particular are particularly immmoral, so its a popular notion; I find it as "bad" that hordes of talented engineers work on optimizing ad revenue for Google.
Humans will always be underemployed from some perspective ("Oh but she could be doing X"). Penalizing them for not operating in a way that is consistent with your (or anyone's) world view is far more sinister.
The fact that smart people's time is also wasted on other types of work doesn't mean there is no such thing as wasting time.
Do you really believe it's meaningless to talk about time being misspent? Would you call it sinister for example to criticize someone for spending their time murdering people at random?
Do you really believe it's meaningless to talk about time being misspent? Would you call it sinister for example to criticize someone for spending their time murdering people at random?
No, its not meaningless -- A lot of good comes from discourse, but its my opinion that HFT takes a disproportionate amount of flak for their real market impact.
The financial sector at large is massive [1], and people seem to think that HFT is proportional in size, but its actually quite small, weighing in at ~2Bn in annual profits [2], which is a blip compared to Google's AdSense revenues. Google does all sorts of good things too though, so I'm not saying that we should reallocate all of Google's engineers to curing cancer, but I think the amount of discourse allocated to vilifying HFT and imagining ways to make "smart people do other things" is out of control.
Edit: Got to read pg's response to @joebadmo about what the dispute is -- No, I don't think its sinister to criticise. I think that's productive and great things start with discourse. I _do_ worry that when issues get blown out of hand people to change the lives of others in ways to coerce them to operate in ways congruent with their moral code. The criticism is fine, but exacting policy to prevent others from doing amoral things is problematic. The (likely bad) analogue for this is European and American cultural imperialism.
Obviously I don't think HFT is "immoral" as others have stated. (I do also think that HFTraders are compensated disproportionately highly w.r.t. their contribution to society, but that isn't unique to HFT's and is far more pronounced in other subfields in finance, and possibly startupdom).
[1] http://techcrunch.com/2011/03/26/friends-don%E2%80%99t-let-f...
[2] http://www.tradeworx.com/TWX-SEC-2010.pdf
The financial sector at large is massive [1], and people seem to think that HFT is proportional in size, but its actually quite small, weighing in at ~2Bn in annual profits [2], which is a blip compared to Google's AdSense revenues. Google does all sorts of good things too though, so I'm not saying that we should reallocate all of Google's engineers to curing cancer, but I think the amount of discourse allocated to vilifying HFT and imagining ways to make "smart people do other things" is out of control.
Edit: Got to read pg's response to @joebadmo about what the dispute is -- No, I don't think its sinister to criticise. I think that's productive and great things start with discourse. I _do_ worry that when issues get blown out of hand people to change the lives of others in ways to coerce them to operate in ways congruent with their moral code. The criticism is fine, but exacting policy to prevent others from doing amoral things is problematic. The (likely bad) analogue for this is European and American cultural imperialism.
Obviously I don't think HFT is "immoral" as others have stated. (I do also think that HFTraders are compensated disproportionately highly w.r.t. their contribution to society, but that isn't unique to HFT's and is far more pronounced in other subfields in finance, and possibly startupdom).
[1] http://techcrunch.com/2011/03/26/friends-don%E2%80%99t-let-f...
[2] http://www.tradeworx.com/TWX-SEC-2010.pdf
I imagine he would call the murdering part sinister, as opposed to the time spent doing something other than what is optimal.
I agree with the GP that the opportunity cost argument is so wholly dependent on the judgment of the debated activity that it doesn't really pertain one way or the other.
That said, HFT doesn't strike me as something that adds value to the economy.
I agree with the GP that the opportunity cost argument is so wholly dependent on the judgment of the debated activity that it doesn't really pertain one way or the other.
That said, HFT doesn't strike me as something that adds value to the economy.
Baberuth and I are talking about whether it's sinister for A to criticize B's actions, not whether B's actions are sinister.
"Would you call it sinister for example to criticize someone for spending their time murdering people at random?"
I'm saying it depends on what A is criticizing about B. It is not sinister for A to criticize B's action. I'm not sure if it's sinister for A to criticize B's misallocation of time spent. It's a weird thing to think about. I think it's weird to think about because, as was my point earlier, the judgment of whether the time was misspent is wholly dependent on the judgment of the way the time was spent.
I'm saying it depends on what A is criticizing about B. It is not sinister for A to criticize B's action. I'm not sure if it's sinister for A to criticize B's misallocation of time spent. It's a weird thing to think about. I think it's weird to think about because, as was my point earlier, the judgment of whether the time was misspent is wholly dependent on the judgment of the way the time was spent.
Correct pg, though for the record, I do also avoid murder whenever possible.
A criticising B is not a problem.
A preventing B from doing something is sinister (life, liberty, pursuit of happiness).
A criticising B is not a problem.
A preventing B from doing something is sinister (life, liberty, pursuit of happiness).
This is a really weird response. Classical liberalism, and its descendants, have had various answers to this question for a long time.
My personal opinion is that one is obliged to act in a way such that the world is not disadvantaged by one presence, but further obligations are dubious. It's not that I'm opposed to using one's talent "for good", it's that other people telling them what to do with their talent has been shown to be a very dangerous game. Particularly if the other people are motivated by the moral fashions of the times.
My personal opinion is that one is obliged to act in a way such that the world is not disadvantaged by one presence, but further obligations are dubious. It's not that I'm opposed to using one's talent "for good", it's that other people telling them what to do with their talent has been shown to be a very dangerous game. Particularly if the other people are motivated by the moral fashions of the times.
The idea that there can be good and bad ways of spending your time is a separate question from whether other people are telling you what they are, or whether you are deciding for yourself.
I understand the difference, but let's consider the context of the claim.
Title: Should high-frequency trading be banned?
OP: How about a tax on capital gains that is inversely proportional to the time the financial instrument is held? The biggest cost HFT imposes on the world is the brain drain.
This thread isn't about discussing the best use of talent, it's about whether talent should be forced to not do certain things, and your post reads naturally in that context.
You: Would you call it sinister for example to criticize someone for spending their time murdering people at random?
I read this as an equivocation, as though misuse of talent falls into the same category as murdering people.
Title: Should high-frequency trading be banned?
OP: How about a tax on capital gains that is inversely proportional to the time the financial instrument is held? The biggest cost HFT imposes on the world is the brain drain.
This thread isn't about discussing the best use of talent, it's about whether talent should be forced to not do certain things, and your post reads naturally in that context.
You: Would you call it sinister for example to criticize someone for spending their time murdering people at random?
I read this as an equivocation, as though misuse of talent falls into the same category as murdering people.
As often happens on forums, I'm responding to the comment I replied to. And I'm only saying what I actually said. I'm not saying HFT should be banned; I have no opinion about that either way. But I do feel it is a waste of talent.
I used murder as an instance of misuse of talent. It is an extreme case, obviously, but if you want to prove the existence of something (in this case the possibility of wasting one's talents), the fastest way to do it is to use an extreme example, since for existence proofs any example will do.
I used murder as an instance of misuse of talent. It is an extreme case, obviously, but if you want to prove the existence of something (in this case the possibility of wasting one's talents), the fastest way to do it is to use an extreme example, since for existence proofs any example will do.
When people interpret communication, I think they usually do this according to what is the usual meaning in the context of the communication--akin to the theory of originalism. In a sustained conversation it's unreasonable to expect readers to perform a context-shift every time someone says something, especially when the in-context reading (particularly the murder comment) is more natural than the out-of-context reading. Judging by other posts and the rollercoaster upvote/downvote response, I'm not the only one who read it "wrong".
Normally it's fruitless to argue about these sorts of things, but I kind of want to see if anyone disagrees with my 'heuristic of conversational originalism'. I'm pretty fond of it myself; it's been very helpful for me.
Normally it's fruitless to argue about these sorts of things, but I kind of want to see if anyone disagrees with my 'heuristic of conversational originalism'. I'm pretty fond of it myself; it's been very helpful for me.
> I kind of want to see what other hackers think of this 'heuristic of conversational originalism'.
It's a threaded comment system, rather than a flat comment system. To me this implies that the search for context should begin with the most tightly bound scope. By default I assume a comment is a direct reply to its parent, as the writer of the comment made a deliberate choice to place it there.
While the larger context informs the tone and examples which will be used, it's the background scenery, not the subject.
> In a sustained conversation it's unreasonable to expect readers to perform a context-shift every time someone says something
Maybe I'm reading this too strongly, but how else can you have a conversation? Every statement is, most immediately, in the context of the directly preceding statement, that's what a dialog is.
> especially when the in-context reading (particularly the murder comment) is more natural than the out-of-context reading.
Again, maybe I'm completely misreading you here. But what exactly do you mean by the 'in-context' reading in this case? The subject as I read it was: "Humans will always be underemployed from some perspective ("Oh but she could be doing X"). Penalizing them for not operating in a way that is consistent with your (or anyone's) world view is far more sinister."
With a larger context of the validity of 'wasting time' as a criticism, the implication that what constitutes a waste of time is purely subjective, and the background example given being HFT vs. Ad revenue. (The choice of HFT as an example being the result of the overall context of the article)
As requested, that's what this hacker thinks.
It's a threaded comment system, rather than a flat comment system. To me this implies that the search for context should begin with the most tightly bound scope. By default I assume a comment is a direct reply to its parent, as the writer of the comment made a deliberate choice to place it there.
While the larger context informs the tone and examples which will be used, it's the background scenery, not the subject.
> In a sustained conversation it's unreasonable to expect readers to perform a context-shift every time someone says something
Maybe I'm reading this too strongly, but how else can you have a conversation? Every statement is, most immediately, in the context of the directly preceding statement, that's what a dialog is.
> especially when the in-context reading (particularly the murder comment) is more natural than the out-of-context reading.
Again, maybe I'm completely misreading you here. But what exactly do you mean by the 'in-context' reading in this case? The subject as I read it was: "Humans will always be underemployed from some perspective ("Oh but she could be doing X"). Penalizing them for not operating in a way that is consistent with your (or anyone's) world view is far more sinister."
With a larger context of the validity of 'wasting time' as a criticism, the implication that what constitutes a waste of time is purely subjective, and the background example given being HFT vs. Ad revenue. (The choice of HFT as an example being the result of the overall context of the article)
As requested, that's what this hacker thinks.
Thanks for the comments. I think part of my claim rests on baberuth's comment, particularly the part that you quoted, supporting multiple possible conversation threads. You can reply to it talking about the criticism of wasting time, or by talking about whether or not in fact people should be "penalizing them for not operating" in that fashion.
There is a significant difference between optimizing ads and HFT.
By optimizing ad revenues, you are increasing the number of people who find a product which they find valuable. This is useful - some people are better off than they would be otherwise.
A significant portion of HFT is simply about winning a race. The first to trade gets the benefits. Doing a better job of HFT merely redistributes the benefits of trade rather than creating them.
(Of course, there are other more useful aspects of HFT. Providing liquidity where none existed before is useful, and providing a better bid when you lost the race (i.e., if you lost the race to bid $10.01 first, you can win the race by bidding $10.02) is also useful. But I don't think the criticism of wasted effort is off the mark.)
By optimizing ad revenues, you are increasing the number of people who find a product which they find valuable. This is useful - some people are better off than they would be otherwise.
A significant portion of HFT is simply about winning a race. The first to trade gets the benefits. Doing a better job of HFT merely redistributes the benefits of trade rather than creating them.
(Of course, there are other more useful aspects of HFT. Providing liquidity where none existed before is useful, and providing a better bid when you lost the race (i.e., if you lost the race to bid $10.01 first, you can win the race by bidding $10.02) is also useful. But I don't think the criticism of wasted effort is off the mark.)
Your point then that Adsense is "significantly different" seems to rely on the notion that it creates value (aiding the discovery process) rather than "merely redistribut[ing] the benefits of the trade".
You've basically already pointed out that HFT has value of some sort to some people (other than the guys who rake in the cash), so that makes it harder for me to see what the significant difference is.
The way I see this is: 2 groups of people (goog engineers and hfts) engaging in activities that deliver value to some people (and annoy the hell out of others). Should we consider acting in ways to prevent them from pursuing their activities; if so, _why_ are we doing that, and are we even targeting the more egregious transgression?
The "Is HFT good" debate is distinct from the point I'm making , so I'd rather have that in another thread. yummyfajitas, I'd be happy to chat with you offline about that, or in person anywhere in NYC.
You've basically already pointed out that HFT has value of some sort to some people (other than the guys who rake in the cash), so that makes it harder for me to see what the significant difference is.
The way I see this is: 2 groups of people (goog engineers and hfts) engaging in activities that deliver value to some people (and annoy the hell out of others). Should we consider acting in ways to prevent them from pursuing their activities; if so, _why_ are we doing that, and are we even targeting the more egregious transgression?
The "Is HFT good" debate is distinct from the point I'm making , so I'd rather have that in another thread. yummyfajitas, I'd be happy to chat with you offline about that, or in person anywhere in NYC.
The only significant difference I would argue for is a matter of degree. The job of an Adwords programmer is mainly delivering better ads (rather than simply moving equivalent ads to the top), while the job of an HFT programmer is mainly about being the first to trade.
Some HFT is beneficial. Too much wastes talent, but is otherwise harmless. I wouldn't advocate heavy handed regulatory solutions, such as banning all HFT - some HFT is useful, and have no faith in the ability of regulators to get the right balance. I'm just giving my perspective that the wasted talent argument isn't a crazy one.
Always interested in meeting new people, will send you an email.
Some HFT is beneficial. Too much wastes talent, but is otherwise harmless. I wouldn't advocate heavy handed regulatory solutions, such as banning all HFT - some HFT is useful, and have no faith in the ability of regulators to get the right balance. I'm just giving my perspective that the wasted talent argument isn't a crazy one.
Always interested in meeting new people, will send you an email.
It makes a lot more sense if you think about it not as talent being wasted, but as some activities being unwisely lucrative. I don't know much about HFT, but if it's not part of the mainstream purpose of the exchange, then it should be throttled.
I believe you are presuming that all those super intelligent people are hacking on high frequency trading algos because of the big $$$ being made for it.
I think hacking on those things would be great fun. Others might as well.
I do like the idea of putting some kind of brake (or field-leveling force?) on the actual act of high speed trading - without any real economic insight of my own, it seem flaky/shady.
I think hacking on those things would be great fun. Others might as well.
I do like the idea of putting some kind of brake (or field-leveling force?) on the actual act of high speed trading - without any real economic insight of my own, it seem flaky/shady.
Imagine if all of those smart people were doing something productive instead of helping people buy and sell options 1 microsecond faster.
From each according to his ability?
From each according to his ability?
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How about turned based trading? Once an hour, on the hour, results published at half past...
Something I've favored considering. Put the exchange on a stepped clock. Randomize order processing within each step.
I don't care if a lot of people lose their financial jobs. Through their own actions as much as resulting events, they've demonstrated themselves to be harmful parasites.
Modern society depends upon a degree of stability and predictability. Current market evolution has been heading in the opposite direction. Time to reign it in to its role as tool, not goal.
I don't care if a lot of people lose their financial jobs. Through their own actions as much as resulting events, they've demonstrated themselves to be harmful parasites.
Modern society depends upon a degree of stability and predictability. Current market evolution has been heading in the opposite direction. Time to reign it in to its role as tool, not goal.
Depends on how you define 'High-Frequency Trading'
The natural economic question is: if HFT traders are making more orders than is efficient, who loses? The answer almost certainly has to be the exchange, and those traders who are losing the time race to HFT's order-spamming advantage. But when Joe the Consumer places an order on the exchange, he always get the best price--it's hard to imagine a way Joe, or even Joe's Mutual Fund, can anything but benefit from HFT.