Interesting that you "don't know" something and would immediately start passing laws about it...

No they would not. Even if you introduce a 10 sec delay, there will still be someone which will be first after the 10 sec pass, and you can still create models which will be tuned to predict what the price will do 10 sec into the future.

And what do you think about a law which forces all news agencies to wait 1 hour before reporting major news, so that everybody gets a chance to report it, and not only the huge agencies/papers like AFP of NYT.

GP specifically said "a bit of random latency". Don't change the terms of his argument to make it easier for you to refute, that's dishonest.

There's no reason HFT can't or wouldn't exist even if you add random latency.

I agree that it's likely not particularly useful for the market to care about things in millisecond resolution.

That's a very clever comment, but I think you should include something indicating why for those who don't know how HFT works.

If nothing else, it means that firms that can afford to collocate their servers in the cage next to the exchange's servers have an advantage over those that can't.

It seems like something like the roundtrip time for a packet from NYC to Tokyo would be a fair "speed limit" for exchanges, and ensure that all firms, globally, are on an even footing.

I think you'll find, when you try to get down into it, there's no easy way to enforce a speed limit. It's a naturally arising behaviour. You could try making a market that crosses orders every X seconds, but then you move the speed to the edge of those periods.

If you wanna slow down HFT, then kill the stupid restriction that stocks be priced in pennies. With 8 digits of resolution, HFTs would then be forced to compete on price.

That's an interesting idea. Is that rule just a holdover from the days of manual accounting?

From my own conversations with exchanges -- I think this is just the exchange appealing to layman investors. The exchange wants to appear liquid, and they like to do this by having a lot of shares on the best bid or offer. If you reduce the tick sizes, you'll definitely see fewer shares on the inside bid or offer (even though you'll see more shares on the inside x% for any x, aka. you'll see more liquidity), but the layman investor (e.g. mom and pop, retail traders, people like brad katsuyama, etc.) will suddenly think you're less liquid because the best price now has fewer shares.

That's, at least, the strongest argument I've heard for why tick sizes aren't reduced more rapidly.

The round trip time between NYC to Tokyo is very short; Any computer system could beat any human, even at that scale. I'm not sure what you think you'd accomplish here; you'd just have HFT with 150ms response times instead of 1us. But you'd still have HFTs.

Yes, obviously.

The point is that there would be no incentive for HFT firms to invest endless money and effort trying to eek out a few more microseconds because that would no longer be a viable trading "strategy" (if you can even call it that).

The problem with HFT firms isn't that they're fast, it's that their only focus is being fast. There are all kinds of interesting algorithmic trading strategies that use data analysis or complex models to make rapid trades: those systems are adding information to the market and making it more efficient. In contrast, pure HFT only adds dubiously-necessary "liquidity" by being quicker on the draw than other firms.

I'm not sure where you get the impression HFT firms only focus on speed. They focus both on being smarter (having better signals) and being faster; it's only very niche HFT firms which rely entirely on speed as their edge.

Also, what's your goal here? It doesn't sound like it'll necessarily impact the profits of the HFT industry as a whole if you do this, merely lower the cost, so on net making the average HFT firm richer.

Lowering costs should allow more firms to enter the market, not just pad the profits of existing participants.

If a HFT firm is richer because they're smarter, I don't have any problem with that. That's how investing works. Developing smarter ways to analyze data, setting prices accurately, having a market that responds to new information, these are all social goods.

I am less convinced that everyone trying to be in the same datacenter as the NYSE (https://www.bloomberg.com/news/articles/2016-04-13/inside-eq...) adds any value for society.

I mean, I'm all for lowering costs in the HFT industry, it'll mean the company I work at makes more money -- I just didn't realize you were arguing for the industry, not against it. I don't think any HFT firm would disagree with lowering costs to themselves, the same way they'd prefer that CPUs were never upgraded (so they didn't have to waste money buying the latest ones).

Co-location is good because it commoditizes the closest location to the exchange. Speed always matters, even in randomized auctions, even if you have artificial latencies added to your order, even if... Without co-location done the way it is now, you get into situations where a single firm buys the actual nearest location, and has a monopoly over being the fastest competitor. Now, anyone can access it.

> Now, anyone can access it.

Where "anyone" = any investment firm with millions of dollars to spend on their IT. :)

Yes, things costs money. It costs on the order of several thousand per month (on the upper end), not millions of dollars -- moreover, this is commensurate with the cost of actually running such a data center (which the exchange sponsoring the colo typically does). I would also argue that, for anyone who actually receives any benefit from being colocated, several thousand dollars a month in operating costs is not prohibitively expensive.

It is useful if you start thinking about products whose prices depend on the prices of other things.

Suppose that I'm a SPY trader. I need to know where a bunch of other things are trading in order to figure out where I should be quoting SPY.

If I only know those prices on a second stale basis then I can't get my hedge off and so I can't quote SPY as tightly. I lose, investors lose, and investment banks win because they're better adapted to trading where prices aren't clear.

People who are pro-HFT see it as a way of increasing the 'liquidity' of the market. In their eyes it makes it easier to move volume of stock, and moves the bid price of the stock closer to the ask price of the stock.

That argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity.

HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the market, they can front run trades and make money. That's all it is. There is no benefit to the seller, to the buyer, or to the market. It's pure parasitism.

before HFT these transactions were run by human market makers from giant banks who skimmed hundreds of times more profit off of them (this is the reason that you hear about it in the news all of the time)

Someone's job is going to be to sit between the people who just want to sell and those who want to buy- when we talk about liquidity it's just this. The fact that you're directing your anger towards some robots who are ruthlessly driving each other to the minimum possible gap between the buy price and the sell price on this is bizarre

HFT aren't the firms putting the markets on computers. HFTs sit between the computers and the retail traders and use that information advantage to front run.

There's no reason there needs to be a middleman here. Buyers can buy from sellers directly. In fact that's what they think they are doing, except that the HFT firms are basically adjusting the price on them underneath the sheets.

The real losers are the sellers. They put up some product at a price, someone else on the other side of town sees a slightly different price because the market only moves at the speed of light. Instead of the seller getting a little bonus, that bonus is hoovered up by the HFT guy in the middle who has a more accurate view of the market.

What service did the HFT provide? Where did this mysterious liquidity come from?

In the old days the middlemen were responsible for actually finding the guy making the sale and matching him up with the buyer. This was real work and it makes sense that people would be paid for it. Now the computer does it for you, there is no need for a middleman and no value he can offer. It's a parasitic relationship.

The liquidity comes from the HFT market maker's own money. Market makers are required to post bid and offers of a reasonable level of liquidity in all symbols they are registered to "make markets" in. It may seem like a simple skim off the top operation, but it's not that simple. If they do not maintain their bids/offers, they are disqualified from market making.

If they do maintain them, they reap a number of benefits including discounted pricing from trading platforms and IIRC, the ability to do naked short selling (which IMO should be off-limits for all trading firms). I'm not defending HFT here, just stating a fact that market makers are a part of the trading ecosystem.

Keep in mind that "making" and "taking" liquidity is not the same thing as buying and selling. Market makers are required to post both bids and offers. The difference is that market makers put their orders (buy or sell) on the "book", which means they are offering liquidity in both directions. The order that comes in to match (think "market" order to buy or sell) is the "taker". Firms that supply liquidity are rewarded by trading platforms (unsurprisingly, since those firms "make" their market), and firms that match those orders (takers), are charged for the service.

Not all HFT outfits are "market makers", but many are. I can't say specifically if Virtu is a market maker, even if I remembered :) The point is that liquidity providers don't pay for their trades, they are paid for them, so it's a natural fit for a smart HFT operation.

> which IMO should be off-limits for all trading firms

Out of curiosity -- why?

Traditionally market makers do more than match orders from other parties:

https://en.wikipedia.org/wiki/Market_maker

This is because sellers don't always want to wait around for buyers and vice versa.

Sellers that are worried they have poor market visibility can just put in a limit order that they believe represents a fair price.

Does HFT only hurt "other bots"? My understanding was that HFT could take advantage of faster feeds to front-run human traders.

It hurts anybody who sells a stock.

You sell a stock at a certain price, someone else looks up the price of the stock and sees that it is slightly higher than what you listed, because your information is still propagating through the network. That person offers to buy the stock at the higher price. The market matches your offers up. Then the HFT steps in and buys your stock and resells it to the buyer at the price he asked.

There is no value to the seller or buyer. Zero risk to the HFT firm. No improvement in market conditions--the HFT firm doesn't sit on positions, they can't increase liquidty. Just free money from abusing a latency advantage on their view of the market.

Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too.

Assuming that at some point bids and asks will line up and trades will happen doesn't a market make; that's the exchange's job. Making a market means being able to quote prices on both sides of the book and having inventory to trade at the current market price. Carrying that inventory has actual risk involved, and that's why it's not a free service that the exchange (or anyone else) provides. Market makers also get penalized by the exchanges if they're not making markets for some large percentage of the time that the products are trading.

Maybe a better way to look at it is that the exchange is there to match up buyers and sellers at the current price at a given moment in time. The market matches up buyers and sellers at the current price over a period of time. This market stabilizes the price over time. Demand and supply just don't line up perfectly like it seems like they should. That's the difference between the market and the exchange. If I'm buying a product now, I want an idea of the true value of it, and the less the price is whipping around waiting for demand to match the supply, the more I know what the current market rate is.

I'm not saying they're doing gods work, but to say that there's no risk involved or reason for them to exist is incorrect.

If you don't buy any of the above arguments, then I'm interested in your answer to the question of why the exchanges themselves pay market makers to make markets. If the current technology renders market makers obsolete, surely the exchanges would recognize that and keep the money for themselves, no?

No exchange operator is doing "gods work" :) Seriously though, you are correct. Market makers are an integral part of how the markets function. Do they skim money from trades because they are better equipped to read the market at a given point in time? Absolutely. Do they also provide liquidity for the retail trader in a given moment to buy/sell shares? They definitely do. Market makers are not a new facet of trading systems, they are just a natural fit for HFT firms. Would it be better for your order of X shares of N company to go unfilled, or to pay .01 cents more per share to have it executed when you want?

Market making and HFT are different services, they may be done by the same company, but you don't need sub-ms views of the market if you are actually holding positions.

This is why HFT firms end every day with empty books.

Can you explain this in terms of actual orders placed? How do you "sell at a certain price"?

Something is providing the liquidity that has brought spreads down over the last couple of decades.

Computerized trading. Sellers basically publish their positions on a server and buyers query for the best price on a stock and the place the order. None of this requires or benefits from HFT.

Literal front running is illegal.

The thing to accuse them of is book stuffing.

You are right, the Wall Strret banks are known for their rigid moral codes and absolute devotion to the law over the potential for free profits.

No, the idea the HFTs reduce spreads is false. See the research done by Nanex: http://www.nanex.net/aqck2/4594.html

I have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.

Unless you're a bank or have similar means you can't compete.

I'm not sure I understand the argument. The publicly traded top trading firms are much smaller than the banks. They're in the $1-2 billion range.

Of course you need money to compete. You need money to compete with Facebook too.

Heaven forfend that people should form their own opinions on first principles, even though those opinions might be mistaken.

Thank you. I always have a hard time getting this message across.

There's just a huge number of securities you can trade now. Most equities have monthly options (so e.g. about ~50 calls & puts * 6 months) and the indices have weekly now. And those are just the basic derivatives, the OTC stuff gets even crazier.

The CEO of Vanguard likes HFTs.

http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...

"We actually have a really good perspective on this, and there's no question in our mind that the cost to investors through funds has come down," he said.

I can't help but to think the problem is being intentionally framed in an unhelpful way.

The problem is their ability to front-run people. They shouldn't be able to get a more accurate view of the market than anybody else, and they certainly shouldn't have the chance to roll-back their actions after they get a glance of the results. Frequency of trading is irrelevant.

Firms with enough money to spend _can_ get a more accurate view of the market. The issue is proprietary data feeds. A trading platform is required to disseminate information to the consolidated tape at the same rate they do for a private feed, but that only holds for the "walls" of the trading platforms network. The consolidated tape is a LOT slower than a 100MB multicast feed being slurped up by a co-located server sitting 20 feet from the trading system.

If an HFT firm was "front running" as you put it, and you know about it, why doesn't the SEC? Front running is not legal. Or are you using the Flash Boys definition of front run which is "anyone that trades better than me" or "anytime I try to buy 50,000 shares but move the price"?

The SEC doesn't have infinite resources, but has to enforce somewhat selectively. It's possible that they disapprove of some kinds of HFT activities but doubt their own ability to persuade a jury sufficiently well to justify the cost of prosecution.

I don't mean this as a comment on HFT or the law, I really don't know. I'm just pointing out that the SEC is bound by budgetary constraints and that litigation is very expensive, so they have to do cost/benefit analysis and prioritize the cases that are more likely to win.

And this is before political considerations come into the picture. News articles described the 'resident's SEC pick as being more interested in capital formation than enforcement; that seems a pretty reasonable assessment to me, given that S&C was representing Goldman Sachs during the epic CDO litigation, the cabinet is stuffed with GS alumni, and the administration's general attitude seems to be less regulation for more muscular and dynamic capitalism.

http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y...

aka pure capitalism, which is very darwinistic, by design.

Do yourself a favor and lookup the history of the IEX exchange, and read flash boys. They do just this, but HFT traders still trade there and make money, just probably less of it.

Any reading of Flash Boys needs to be accompanied by Flash Boys: Not So Fast. Or just a really critical eye. Flash Boys is beyond bizarre in the silly things it implies (like some major manager's trading PC is hacked or something, but somehow that's fixed with IEX). Or how they lament some guy can't buy huge amounts of stock without moving the price. It's a nonsensical book.

Also fun fact for you. Flash Boys: Not So Fast, was written by Peter Kovac. I used to work with Peter @ Madison Tyler (which merged with and became Virtu ~5-6 years ago). He's literally right on with his assessment.

I should have mentioned that, excellent point.

Because the stock exchanges are private companies that profit from every trade. It's in their interest to keep making everyone trade as much as possible. I doubt anything is going to happen unless all exchanges agree to institute the same policy, or a law is passed to that effect.

I don't know why you're being downvoted. It's a legitimate concern.

While it's true that stock exchange operators are private companies, they are also SROs that undergo significant scrutiny from various government organizations (FINRA, SEC, etc).

Most (all?) exchanges use "maker/taker" pricing, so while it is possible the trading platform might not make money on _every_ trade depending on the exact pricing rules, they do make money in the aggregate, and in general more trades equal more profits. Many of the opponents to HFT believe that the maker/taker pricing model is a big problem in the markets, and doing away with it would significantly curb HFT profits. Personally, I'm ambivalent about HFT. All stock trading seems to me far removed from the actual value of the underlying companies anyway :).

Disclaimer: I was an engineer at BATS Global Markets for 5 years, but have been out of finance for the last 4, so my info may be out of date.

Idk why I'm being downvoted either. I bet in 2 years there will be a blog post which refines the idea I outlined above and it will be on top of HN and everyone will agree with it. That's how HN works.

random nearly constant periodic auctions would be how I would fix it

something like the Turquoise Uncross: http://www.lseg.com/sites/default/files/content/documents/TU...