There are perhaps 4-8 significant players in the HFT space, all employing anywhere between a few hundred to a thousand people. Probably less than 5000 people total, and if you only include programmers and quants, maybe less than 2000. Google alone has 30000 programmers. How many of them are optimizing ads for eyeballs vs “benefiting the country/society/humanity”? What about the thousands of programmers making video games mechanics more addictive for children? I think it’s silly to focus on one tiny industry, and demand that those people should be working on things for the good of humanity, when the fact is the vast majority of humans just work for their own livelihood. I mean, what do you think 95% of the people in SV are doing? Not every company is trying to cure cancer or explore space...
HFT is such a small, niche, industry, and also extremely productive per employee relative to most other industries. (the primary reason for comp being so higher). It replaced the thousands of manual traders that used to be responsible for arbitrage and market making with automated robots, dramatically increasing market efficiencies while reducing the amount of human capital required to provide those services. I find all the virterol towards hft from SV very puzzling, as it seems to exemplify all the things that SV espouses!
IE, Facebook is a giant waste of resources but they employ many of the world's smartest engineers. Because of that they've spawned things like ReactJS which has completely changed web development for thousands of other companies.
I consider HFT to be no worse of a brain drain than, say, Instagram, or any similar virus
I might be missing something, but isn't opportunity cost a good argument for HFT?
HFT employs far fewer people than pre-HFT trading that came before it.
Not anybody in particular but it does hurt society as a whole. It's one of those things that make the rich richer for no reason other than them already being rich.
You want to see what happens without HFT. Look at the crash in 89, when human market makers would no longer answer their phones because they did not know what was going on in the market.
Instead of the crash recovering in minutes, it took hours and had larger widespread effects.
Furthermore, exchanges have now added automatic pauses in trading during highly volatile times, to let traders figure out what is going on.
The markets are objectively more stable, more efficient, and tighter, and better for the general public now with HFTs than they were in the 80s and 90s with human market makers/brokers.
I won't go as far as to say that it's a feature not a bug. But I will say that the problem is currently the least problematic that it has ever been. Because of HFT, stability returns within minutes, rather than hours/days/weeks (which is how long it used to take before various technological innovations)
Not to mention the practice of front-running and other shady practices that HFT's use to make profit.
The average investor holds onto stocks for months to years. A flash crash may last minutes, before the price is back where it was. How does a flash crash hurt the average investor?
> Not to mention the practice of front-running and other shady practices that HFT's use to make profit.
Front running is where a broker or other agent trades on private information given to them by their client: the broker receives a big buy order from their client and then buys the market up on their own account before executing the client order and making a massive profit. This is illegal.
HFTs can't front run - they only have the same public information at the same time as everyone else. The fact they can execute on that faster than others hardly seems 'shady'.
Maybe it can trigger "stop loss" orders?
> Maybe it can trigger "stop loss" orders?
The average investor is a person who has a pension invested across a range of funds held with large fund management companies. Anyone mis-using stoplosses is not an 'average' investor.
It's not illegal, but it is still front-running the rest of the market due to latency arbitrage. Check out Flash Boys by Michael Lewis for more on the topic.
As you say, this is just arbitrage on public information. Latency arbitrage has been occurring for the last 200 years at least, it's an inevitable outcome of any system with multiple, geographicly separated markets.
P.S. I read Flash Boys. It's not very good.
They just happen to be the first among all participants to react. Why is that bad? Somebody has to be first
I am proud of my work and find HFT to be an interesting intersection of computer science, math, game theory, economics, and psychology
As far as the societal benefit of HFT, I think that it is neutral. It doesn't hurt anybody. It might even help a little bit (liquidity and tight spreads save people a little money and maybe spur some economic growth).
However, this particular aspect (the physical latency war) makes me literally sick to my stomach. I hate reading about it and I hate thinking about it. It's like -- what are we even doing here guys?