The only disagreement I have with Thomas here is the last line. Securitization groups at the large banks and HFTs aren't adversaries -- they don't interact in any meaningful fashion. Large banks, taken as a whole, have some groups which are in competition with HFTs but have other groups which are their happy customers. (If you're a large bank, and you're taking liquidity, you are either astoundingly bad at your job or you actually desire to be buying what HFTs are selling.)

The industry standard for buying/selling mortgage-backed securities or collateralized debt obligations isn't HFT. It isn't even automated. It is one sweating jock yelling at another sweating jock over a recorded telephone call. You can see this dramatized in The Big Short, where to unwind the shorts that the "good guys" have made they have to get their own not-quite-sweating not-quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.

> It isn't even automated.

Yes. No. Maybe. There's a massive push towards exchange trading the more liquid products: traders are expensive, and if you can get a robot to do basic inventory management and market making for you (even with a human in the loop), that's savings for a desk manager looking to cut costs in a highly straightened FI environment.

The highly distressed and/or exotic stuff that people are talking about in the Big Short are still slung by salespeople, with the connivance/approval of traders.

In the pre-HFT era there were manual day traders doing spreading, arbitrage and short-term speculation based on the order book. A famous example would be the SOES bandits of the 90s. They would pick-off slow NASDAQ market makers and offer the shares back out on nascent ECNs like Island to make a few ticks.

Some of them worked for firms as professionals, but many traded on retail platforms similar to what you'd see from Interactive Brokers or TT these days. Still you are right that the average investor never traded in this fashion. At worst, the people HFT put out of work were trading as a profitable hobby similar to playing poker online.

I think labeling literally all human market makers as "crooked" is probably excessive...

I've done a fair bit of exchange work, and the stories I've heard suggest I'm not far from the mark.

What about all the human market makers that went on to found HFT firms. DRW, GETCO, Jump, Virtu, etc. Bad guys as well?

I do not believe DRW is colluding with Virtu to keep spreads wide. In fact, all available evidence overwhelmingly suggests that the opposite is happening.

But human market makers colluded routinely, and in some cases famously.

Do you think when Don Wilson (founder of DRW) was making markets in the pits at the CME in the 80s that he was colluding with anyone is more what I was asking. Does he deserve to be labeled "crooked as a barrel of fishhooks?"

Maybe? I mean, he's been in hot water much more recently than that for trying to fix the market. http://www.bloomberg.com/news/articles/2016-03-09/manipulati...

On that case I think I agree with the Matt Levine take that "Back in September I was pretty sympathetic to DRW and after reading the CFTC's complaint. I'll double down on that.†" I guess we'll see what happens.

My only point was that some people think all HFT is bad, and here we have a complaint that actually the situation is reversed and it was actually all human market making that was bad. I don't think either statement is completely true, and I was trying to highlight the contradiction because the human market makers and the HFTs are, in a lot of cases, the same people.

† https://www.bloomberg.com/view/articles/2013-11-06/cftc-sues...

Alright, it's hard for me to explain how sometimes all means all and sometimes it doesn't. But tptacek's comment didn't literally say that every last floor trader was crooked, just that was generally true. And it's easy to see how it could be true. A wink here, etc. The difficulty for anyone to see the size of the order book.

I think it's harder to describe how HFT is bad. Most of the efforts in this thread are, we'll say, only loosely connected to reality.

The best you can say about sweaty men shouting is that if not corrupt, still inefficient. (To say nothing of spreads in eighths.) I think that's a claim that really is true for literally every trader.

I don't think people on the floor were necessarily all crooked or doing something illegal, but that market structure doesn't invite fierce competition. You'd see the same people every day and go to drinks with them. There was a real camaraderie between people on the floor, even if they were ostensibly competitors. Think of any community. Most people would probably work a little harder to have a nicer car than their neighbor, but they wouldn't want to see the neighbor's family starve to death in the process. By undercutting your rivals in the pits, you were literally taking away their mortgage payment, and you had to do it to their face. A lot of the locals in the pits were independent, so it was personal, not just business.

You also could see who was on the other side of your trade. Savvy floor traders would use that information to their advantage. If a sharp broker traded with you, you could hedge more aggressively or speculate in the same direction. Most electronic markets are anonymous these days so there's less information leakage.