A Former High-Frequency Trader Justifies His Actions
This is a great two part series from a former high-frequency trader, in which he explains high-frequency trading in depth, while also justifying its value. It's a must read for anyone looking to get into quantitative trading.
I particularly like how in part II, he challenges the critics of HFT to back up their own claims, saying:
In the Hacker News comments on part 1 of this series, there were several comments suggesting that HFT’s somehow steal pennies from ordinary investors. I don’t agree with this claim, but I’m very interested in hearing well reasoned disagreement.To encourage disagreement to be well reasoned, I’m going to make a suggestion. If you want to claim HFT’s are somehow robbing retail investors, please write down carefully the mechanics of how this works.
None of the critics could actually back up their claims in the comments. This is not to say that I personally agree with HFT, but I have yet to see someone put forth a well-reasoned argument against it. Thoughts?
part I:http://www.chrisstucchio.com/blog/2012/hft_apolog…
part II:http://www.chrisstucchio.com/blog/2012/hft_apolog…
My reason on why HFT is bull is that their argument is that they make money based off of their strategies, not front running other trading activity. If that's the case, then why do you need to be able to place trades in a matter of microseconds.
My view is that the SEC should impose a time limit rule on how quickly you can place trades...if the HFTs are really about the strategy then this should not impact them...given how critical they are of such measures suggests otherwise.
Any limits that the SEC imposes will have terrible and unintended consequences.
The problem with trying to poke holes in their argument is that you just don't know. So much of what they do is proprietary and shrouded that their claims of simply being market makers foremost are theoretically plausible. If they are indeed just getting their a microsecond before and then flipping to the next person, I don't have any problem with that. The issue arises in my mind when you see a price but can't execute at it because they are pulling the orders back faster than you can even comprehend. I would say this affects so few investors that having the SEC define some arbitrary period of holding is probably not a good idea and would certainly do more harm than good. Frankly, until someone decides to just break their NDA agreement after they get terminated at one of these places and reveals an evil and nefarious scheme to defraud grandma when she sells her shares in an IRA, most of this is just banter back and forth.
Read into quote stuffing.
Getting you fill off by a 1/100 of a penny is the least of the worries associated to HFT.
Remember May 6th? Absolutely zero liquidity then on the way down. Only place offers were found was some 10% down from opening market prices, yet what about the millions of "deep" liquidity available at supposedly every increment lower on the SPX? Not there.
Fact of the matter is, it's as easy (if not easier) to turn your HFT algo off just as it was easy to tell your specialist to not make ANY market, a la 1987. So the question lies in how is HFT any better off for retail much less institutional investors if one can't be sure if prices will hold come a black swan event which in the end won't be such a black swan after all.
This. Themis Trading has written a lot about the explosion of quotes due to HFT. Fiber optic cable demand is shooting up because of latency reductions for HFT.
This is liquidity no one needs. Can't for the life of me figure out why flash quotes are ok, either.
I would love to hear the pro-arument suggesting that executing trades in 20 microseconds provides more liquidity than placing a trade in a 100 microseconds.
I don't think it does, but I fail to see where it hurts you if your buying a stock. If I have two HFT guys jockeying for extra microseconds it hurts one of them because one got my order and the other didn't. I don't care who I bought it from, I got my fill at X and it was filled by 20M rather than 100M. Doesn't matter to me. Either way I got the price I was looking for (I'm assuming whoever is trading in this market is not stupid enough to place a market order. Obviously there are times when it is okay to use one, but on the whole you should avoid them like the plague) I fail to see how that hurts me, or anyone for that matter.
Problems with HFT: 1) 99.99th percentile intelligences working on trading strategies that could be doing far more valuable things for society. 2) low liquidity situations are still possible (I'm not even convinced they are less likely than before).
Solution: 1) Tobin tax.
talk with some MIT and Princeton Ph.D.s in physics on the academic job hunt how much their brains are valued outside of Wall Street.
Was talking with a harvard physics m.a. who was deciding on whether to take an offer from a top european university phd program in physics or to try for Getco. Apparently it was a tough choice that he had not solved yet.
Many of the markets that depend on HFT for liquidity lose that liquidity the second things become volatile. Many of these shops have pretty tight risk parameters set-up and will just shut off the second things look a little hairy. That's problematic when these same people are being paid (through rebates, prioritzation, etc.) to provide such liquidity.
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