A few players using them effectively is different than 30-60% of the market being run by algorithms. Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN.

You have to account for the fact that a lot of the algorithmic volume is due to ETF arbitrage. We now have more ETFs than stocks in the US by a wide margin, and each new ETF likely creates another trading opportunity. There are also a lot of factor and smart beta strategies now, which I would classify as more systematic, but these could distort the market more than arb strategies.

Not disagreeing with you, but the arbitrage generally lasts only for a few ms, which makes the article's comment incorrect:

"Visit a trading floor today and you will hear the hum of servers"

In my experience, the machines doing the actual trades are as close as possible to the exchange, generally inside. What's in the trading floor are the client and ML programs that issue the strategies. That said, I've been away from the industry for a few years and it might have changed.

relevant

weak human + machine > machine > strong human

https://curatedintelligence.com/2017/10/20/kasparovs-law/

But strong machine > all?

IE. Chess / Go / Dota 2

lol, no, that's the point.

A better machine is just a tool.

One that someone who's smarter than you is going to use to win at the game of poker.

Hence Kasparov's law. You know, the chess guy.

>A better machine is just a tool

For now.

>Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN.

https://outline.com/nGrnKy

Thanks this looks good

yeah, this article lacks any material substance.

Absolutely.

I'd recommend "Flash Boys: A Wall Street Revolt" for more substance

See also (as a rebuttal): "Flash Boys: Not So Fast"

A much more entertaining and informative book than it's title or pedigree would hint at. Genuinely recommended reading.

One of the most surprising details in the whole book was the trading system devised by the biggest HFT-complainer, "Thor". And not even the system itself. Trading firms have to connect to practically all the exchanges, because they need the ability to send in orders directly to one of them. In trading, adverse selection is a thing - if an institutional trader sends in a big order, liquidity providers (HFT firms) can get hammered pretty badly. So when someone is buying or selling in one exchange, the HFT shops will adjust (read: pull) their quotes on other exchanges before the same executions would hit them there as well.

The basic assumption of a liquidity provider can be summed up as: if someone is executing trades, they must know something more; the prices currently on offer are clearly wrong. Pull quotes before things get expensive.

Thor wasn't exactly an optimisation engine, it was more a synchronisation engine. It kept track of transmission latencies across all the exchanges and could coordinate order creation times to such a degree that the orders that it wanted executed would land in all the exchanges at almost exactly the same time. This would allow it to execute its orders on all the exchanges at the prices available at that very time, without giving HFT firms the time to communicate across exchanges to pull their quotes. If I remember correctly, even the book used the term "slam" for the behaviour.

Thor used a strategy that any half-decent engineer should come up with in less than 5 minutes. But it was considered unfair by all the other market participants. The book didn't tell much more about Thor, other than that its use was discontinued shortly afterwards.

Rather amusing, nonetheless.

that book is garbage

As someone who enjoys a lot of Michael Lewis's books, I completely agree. The arguments and explanations throughout make no sense, because it's a lot motivated reasoning trying to justify a false narrative.

It all made perfect sense to me. I'm not sure why people get so upset about it.

I suspect people can't tell the difference between the arbitrage that will happen no matter what (Chicago to New York, etc.) with the front running that came from seeing orders too large for one exchange and buying the rest from the other exchanges so they could sell it to the original buyer.

I mean that part is true and is exactly how markets are supposed to work, but the conclusions he draws are just bizarre. He makes the argument that HFT is the classic story of the fat cats stealing even more money from the little guys. But it couldn't be further from the truth. HFT's are helping the retail investors and actually "stealing" from the "fat cats" (institutional investors). Retail trading is now cheaper (free in a lot of cases), easier, and faster today than it has ever been, largely due to HFT firms and low-latency liquidity providing strategies. Also the ETF revolution and the massive democratization of financial asset classes and strategies is entirely predicated on HFT arbitrageurs.

But Lewis realized that the idea of HFT actually helping the little guys and hurting the big guys wouldn't be as sensationalist and provocative a story, so he decided to twist the facts to suit his own narrative.

That's really not true.

Trading is cheap now... because it's all been computerised. The exchanges are digital - as soon as you can do all the transaction processing by computers there is an entire army of (expensive) clerks that can be laid off who used to handle the paper work. HFTs occupy a niche where they can exploit latency between exchanges for profit, with occasional other activities that were considered to be far more questionable when it was people playing those games, not algorithms.

>Trading is cheap now... because it's all been computerised.

This is true but the (fairly recent) move to essentially free trading for retail investors exists because firms will pay money to brokerages like Robinhood just to get the opportunity to trade with a pool of traders that are unsophisticated.

Am I reading this correctly that firms subsidize Robin Hood in order to fleece their customers? Curious to hear more.

Paying for order flow doesn't fleece customers. Those customers are guaranteed to trade at the best price by NBBO.

So why would people pay for order flow? The people who do this are liquidity providers. What they want to do is sit there and buy a stock for $10 and sell it for $10.01 all day long. If they are buying and selling to you or me that is a great deal.

But what happens when BIG HEDGE FUND buys a shit ton of stock for $10. BIG HEDGE FUND probable knows the price is wrong at which the liquidity provider will sell a bunch of stock for 10.01 but then instead of being able to buy it for $10, all of a sudden has to buy it for higher. This is how liquidity providers can lose some of their profits.

So they pay brockerages like Robinhood that don't have big hedge funds as customers, not to fleece those customers but just to sell liquidity to them without worrying about getting picked off.

GP is referring to https://en.wikipedia.org/wiki/Payment_for_order_flow

Just because things are computerized doesn't mean firms are willing to provide liquidity. The number of natural counter-parties at any one time are low, this is where HFT comes in, as market makers. Also if you look at the pricing mechanism of ETFs, they simply couldn't exist without HFT. Arbitrage is essential to ETFs, they simply wouldn't exist without low latency creation and destruction of shares.

Wait so you're saying that trade sniping is good for more than just the handful doing it because side effects? I've heard this pro-HFT argument before and always assumed it was biased BS.

I don’t. As someone in the industry, almost nothing in that book is actually correct. Moreover, HFT is a very small part of the industry and is not particularly profitable.

Quantitative investing as a whole is becoming more and more popular, while HFT isn’t.

As someone in the industry, you're also unavoidably biased. This isn't snark or accusation, just a factual observation.

Someone in the industry might just have a slightly better idea of what's really going on and that's largely what HN is about.

Another factual observation is to look at Virtu's recent earnings numbers. They're basically pivoting as hard as they can to get out of speed-based HFT and into execution services, because the profitability of the former is cratering.

Yeah Virtu's market cap is about the same as Groupon. I hardly doubt they're emptying the pockets of every American here.

Yes, but they weren’t the dominant paradigm. The major push toward automation for both the buy and sell-side came after the crash of 2007/2008.

Moreover, very few funds pursue completely automated strategies. Quantitative giants like DE Shaw, Bridgewater, and Jane Street still execute large amount of discretionary human trades. Of course these trades are informed by models to a large degree, but if that’s the definition of automation, the markets have been automated for over 50 years.

Some Quant funds like rentech and peers (quieter) are almost entirely model driven though. They also tend to be the most successful.

I assure you, stock markets stopped being led by human trading long before 2007/2008.

I assure, as someone who worked alongside of traders and had access to hundreds of hedge fund portfolios, that you are wrong.

In one sense you both are right. When a portfolio manager puts in a large block trade, its been common for a long time for execution management systems to optimally handle the execution, by breaking the trade into smaller pieces of varying size, at various prices over a period of time, to try to get the best execution possible. Proprietary systems have been built which are very good at that. So while the gross holdings of a fund might be set by a human, the executions likely are handled by software.

Having worked on an Equity Derivatives desk for a time, I can tell you much of the exchanges' trade volume--as early as 1990--was from DOT (program trading) and super-DOT executions. Monthly volume leaders included Susquehanna Partners, who did almost all of it's transactions via computer (DOT) trades. Late 90s and early 2000s saw the rise of the Swaps market where one deal could generate literally tens of thousands of transactions. It wasn't Bud Fox with a Quotron and a phone doing those executions.

1) Buy-side and sell-side are completely different beasts.

2) Even today, bonds are traded OTC and mostly by people. In the 1990's, 100% of bonds were traded by people. Bond market cap dwarfs equity market cap.

3) Exotic OTC options were a big thing in the 80s and 90s. While that's not true today, when they existed, all of those were traded by people as well.

4) Most hedge funds today manage their positions with excel and trade based on analyst recommendations. They might have some fancy factor ops engine or something, but it's basically an after thought.

5) Around the dotcom boom, Goldman's equity desk had over 500 traders.

Fundamentally we are talking about a lot of different things. Different asset classes, buy-side vs sell-side, NYSE systems vs pit traders, etc etc. We can slice and dice these numbers in many different ways: total number of discretionary firms vs quant, trade volume vs assets, buy-side vs sell-side, etc etc. There's many ways to look at it that result in different conclusions. All I'm saying is that computerized trading is probably not yet the dominant paradigm and it certainly wasn't the dominant paradigm in 2007, much less 1990.

Sure there were high-touch traders, they were still employed up to and around 2017-2018. Since the early 201x's bonuses have been pared to fractions of what they were and each month, every bulge bracket bank lets some formerly well-paid traders go. Fixed income notwithstanding, it's been a tough road for those guys since 2007, have you been to the floor of a major exchange lately? It's lonely. Gone are all those seven-figure a year specialists. No, low-latency and HFT are the dominant paradigm, they are business today. Want more change? Downtown Manhattan used to be all financial. Every block had dozens of Wall St. firms, trading houses, research organizations, etc. Today, it's residential. It's lots of city, state and Federal Government offices. The legions of well-dressed yuppies rushing to get to the trading floor by 7:30 AM... they're gone. Perhaps your experience is different, but this is the reality.