I don't think it necessarily has to be true. I also built a profitable system and wrote about it, but I didn't share all the details. Not even close. There are just too many small details that must be "just right" that they would fill a whole book. It's kind of like building an operating system from scratch. It's not something you can put into a single post or paper. There isn't one "trick" that suddenly makes it all profitable - it's a combination of so many small details.

Then there is the cultural aspect. People who are working in trading are just not used to sharing openly. They don't write online, or anywhere. They are not even allowed to write due to their employers. And people who work in academia are naturally not working on "production" systems - their only job is to write, not to build. So you almost never see people in the intersection of: writes-online & understands-trading & is-not-in-academia

A famous example of a strategy that was published, and shared, whilst still profitable is that of Benjamin Graham, several of his students went on to be incredibly successful traders (we all know about Buffett, right?)

But that's an exception rather than a rule

It is an absurdity to believe there has never been a good trading strategy published in a paper.

The real value though of publishing a trading strategy is in signaling to future employers.

Ultimately, money is made by the ability to come up with new strategies. Any single strategy is only going to live for so long before it dies and it is no longer profitable.

To spread one's wealth, one can donate to charities.

Opening up one's secrets of trading seems to only make sense if one has found deeper, more effective secrets, so that the old crop is not going to be seriously competitive, but a bit of good PR would come in handy.

Trading is inherently zero sum.

Zero-sum in wealth, but not zero-sum in utility. Otherwise, people wouldn't trade at all.

That's not true, it just needs to cost you more to not play than it does to play.

Something like:

    |            | Play | Don't Play |
    |------------+------+------------|
    | Play       |   -5 |        +10 |
    | Don't Play |  -10 |          0 |

Your payoffs are not zero sum.

> In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which each participant's gain or loss of utility is exactly balanced by the losses or gains of the utility of the other participants.

Yes? The point is that no one playing has the highest payout for the group[1].

[1] You can change the +10 to +9 if you want to make it the absolute highest total payout.

Sorry I don’t follow. Can you elaborate?

Not always. People have different time horizons on the utility of money and non-linear outcomes on risk.

For example, a gold miner may sell gold futures to guarantee that he won't go out of business once the construction of the new gold mine is complete. There are many other examples.

That's only true in the sense of opportunity cost. I may buy something at $10 and sell it at $15 making a $5 profit. Then it may go to $20. Did I lose $5/share? Sure. But in reality I wasn't a "loser".

I find that in reality opportunity cost rarely matters.

If you buy something at $10 and sell it at $15, where are the $5 profit coming from? From the other market participants, e.g. someone selling to you for $10 and later buying it back for $15, losing $5 in the process. Your profit and their loss sum to zero, which is what "zero-sum" means.

It has absolutely nothing to do with opportunity cost, or whether you, personally, are a "loser". But if you're a "winner", someone else must be the "loser".

In this simple example, yes, but you are assuming that monetary value = utility. That's not always the case. People have all kinds of different incentives for participating in the markets.

Let's say I am a market maker offering to buy Apple shares at $99 and sell them at $100. Let's take an ex-Apple employee who owns some shares. He just had a family emergency and wants to liquidate his shares to get cash, and he needs it quickly. He doesn't care about paying a few dollars extra in exchange for a quick trade because he needs to pay a bill tomorrow. I buy his shares for $99. He is happy because he immediately got his cash.

On the other side, there is a a retail investor doing long-term investment and wants to add Apple to their portfolio. They also don't care about a few cents because they're holding the stock for a decade and love the new CEO. They buy my Apple shares from me for 100.0. They are happy because I can guarantee them a stable price for a decent number of shares.

All participants are happy. I just made $1 from the spread for providing liquidity, the investor got the long-term investment they wanted, and the ex-Apple employee got his cash.

Sure, both sides of the market could have made more optimal trades if they had put in more effort and "optimized" their trades with algos and somehow skipped the middle-man, but they would've sacrificed convenience and time, which may be worth more to them than the little bit of extra $ they paid. Aren't we all winners?

When you go buy bananas in your grocery store you also don't complain about them taking a cut for providing liquidity. You don't say the farmer has "lost" money because the consumer paid more than what the farmer originally sold for to the grocery store. The farmer is happy because otherwise he may not have traded at all or his bananas may have gone bad (= needs to trade quickly). This is no different.

Asset values can just increase. Alice who has $10 and 0 units buys 10 units from Bob who has 10 units and $0 dollars. Alice then sell back to Bob 5 units for $10 dollars. Alice now has 5 units (worth $10) and $10, Bob now has 5 units (worth $10). Total wealth in the system went from $20 to $30.

In addition, companies produce things, some of that wealth gets returned to the investors through dividends, interest (eg on bonds) and buy backs (in my example, let's say each unit generates $1 in dividend, now total wealth is $40(!) while starting at $20, including $20 cash (starting from $10) and $20 worth of units (starting from $10)).

In fact, we see this growth everywhere around us as both the amount of people and the amount of goods and services per person is increasing!

Market makers (market participants who are interested in either buying or selling) are like used car dealers. If you are in the market to buy or sell a car, you could choose to find a buyer or seller yourself, and you may well get a better price going that route. It will also usually require more work from you and take longer than if you just went to a car dealer. So that's the tradeoff: save time via an intermediary (who will likely profit from the transaction), or do more work yourself and possibly get a better price.

You didn't take another very important unit into account: time and risk. Let's say you want to sell your used iPhone. You might get $150, if you wait around for the right buyer, but this might take a while and even after waiting it is not guaranteed you find a buyer for that price. The price could even go down to $80. Alternatively you could go to a pawnshop and get $100 dollars instantly. And if you are happy with that price you can go on with your life and focus on other things.

> Or does it always reduce down to "I win only because you lose"?

It is a zero sum game. Nobody is producing anything, therefore for one to win another must lose.

I think thats an overly simplistic view of things. The market is big and many participants trade at different frequencies. Large pension funds need liquidity to move big blocks of stock for their quarterly and monthly rebalances, and the big medium term statistical arbitrage traders provide liquidity for them to do so. HFT players provide liquidity for the stat arb players. The classes of participants with different frequencies actually help one another, while there is competition for alpha within strategies with similar holding periods. Overall the system creates an extremely efficient and liquid system for valuing and exchanging equity - the very system that empowers YCombinator and other Venture investors to make VC investments knowing that their winners will eventually IPO or be bought by public companies.

I knew someone would come in with "liquidity".

Many HFT jump out when things get volatile, when liquidity is actually required.

Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. The costs required to compete at the lowest latencies are large, and forcing small/medium players out the game, as the investment cost is large, which is also bad.

The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.

My initial comment was discussing speculative trading in general, but since you mostly brought up some common anti-HFT tropes I might as well address them.

> Many HFT jump out when things get volatile, when liquidity is actually required.

Do you have a citation on that? If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets.

> Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero.

HFT is a mature industry. Latencies have mostly stabilized, and profitability is way down in the last few years. Many firms are merging/consolidating. So in the past few years society is actually spending fewer resources - both financially and from a human capital standpoint on HFT than it did in the past.

> Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world.

IEX is doing something relatively similar to that for a few years now. They have ~3% of US equities market share. People have the option of trading there but they mostly choose not to.

> The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.

Due to consolidation, costs are actually decreasing. Could it be that the market is... working?

[0] - https://ir.virtu.com/press-releases/press-release-details/20...

> If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets.

Similar story from Flow Traders:

https://www.flowtraders.com/sites/flow-traders/files/quarter...

Everyone is, volumes are hugely up. The point about liquidity is during the sudden market shifts, not over a quarter!

Perhaps you don't follow the news? This was a quarter rich in sudden market shifts.

Thanks, I do follow the news. If you read the threads above again you will see that both posters are fully aware of elevated volume, and the distinction was between HFT melting away during short periods of vol and wider "liquidity" from HFT.

So what seemed like a quick drive by wasn't actually correct.

> I'm certain HFT vols are up in the volatility. Not sure that proves or disproves anything.

You said that HFTs jump out when things get volatile. But then I show you evidence that they trade more in high volatility. Do you not see the contradiction?

> HFT is hugely expensive to maintain. Staffing and equipment costs are massive.

HFT firm equipment costs are a few racks of high end servers and some expensive networking equipment, and a few dozen to few hundred highly paid engineers. Before HFT there were literally _thousands_ of human traders working at different banks doing the same work by hand. Sure in an absolute sense HFT is expensive, but relative to the alternative it is cheap.

> HFT choose not to trade on exchanges with delays because they want to exploit latency advantages. That's why govt should regulate this on all exchanges to just wipe it out.

If HFT is so bad, then the non-HFT market participants should choose to trade at the delay exchanges that make it harder for HFTs. But they choose not to, generally, because the liquidity - and thus trading costs are higher than trading at the non-delay exchanges.

> Consolidation is not good because it will collapse into a monopoly. Which will require regulation also, because markets do not "work" on their own.

First you say that HFT is bad because costs are high, but now you say that falling costs are bad because it will lead to monopoly - do you see the contradiction? For what its worth, Although there are fewer firms there is still a lot of competition among the remaining firms.

> You said that HFTs jump out when things get volatile. But then I show you evidence that they trade more in high volatility. Do you not see the contradiction?

We should distinguish between volatility at different timescales. An HFT might well be very active over a volatile month, but may still turn off over a very volatile second. I've always assumed that the "HFTs jump out during volatility" complaint was about the latter; it means that when some shocking news hits the market, the HFT firms providing most of the liquidity pull it, and so the manually-entered market orders wanging around end up moving the market further, exacerbating the volatility. Maybe that's not what people are actually complaining about, though.

> HFT firm equipment costs are a few racks of high end servers and some expensive networking equipment

And FPGAs. FPGA development is really not cheap.

Exactly, that was my point and I thought that would be understood by someone in the domain. Same for HFT vs "electronic" in general, again someone in the domain would get that distinction immediately.

HFT = electronic trading, or at least the bulk of it. The human traders that existed before HFT firms & HFT desks at banks were largely doing the same thing that HFT firms do now - making markets on a wide range of securities, but less efficiently.

Latency-arb is a small part of HFT, if you consider strategies that provide liquidity to be "good HFT" and strategies that take liquidity (via latency arb or other arbs) to be "bad HFT" then those strategies are largely executed by the same market participants.

You were replied to, but I'm going to ask some questions of this moralizing.

> Many HFT jump out when things get volatile, when liquidity is actually required.

This feels almost like a "no true Scotsman" situation. Why is liquidity not "actually required" when volatility is low? Is it a moral obligation for any trader to catch a falling knife? I see this condition of "when liquidity is actually required", but I never understood why there was such a strong feeling for it. Why do you believe this?

> Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero.

I don't know, I could probably take a similar view of so many jobs in tech. What does society really get from Snapchat, what do they get from HQ Trivia, what do they get from people making powerpoint presentations with arrows that point to synergies. What's the point of any job with some amount of abstraction?

> Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world.

Why?

> The system is hugely inefficient

Do you know how efficient the system was before HFT started up? And, do you know how many people were working in trading before, and how many are, for a similar fraction of stock volume?

> The law of diminishing returns.

OK.

> Do you know how efficient the system was before HFT started up? And, do you know how many people were working in trading before, and how many are, for a similar fraction of stock volume?

Again this weirdly mixes HFT with electronic automated trading, which I really don't think anyone in the domain would readily mix.

HFT by arbing over latency is entirely different to the automation of boring trader tasks that see less people employed to do the same thing in the front office.

I can't continue this more, it's just blind allegiance from people who are clearly not in the domain.

HFT != electronic trading

I have to disagree, I know that HFT != electronic trading.

HFT is also not equivalent to arbing over latency.

That's overly simplistic. While the overall system may be zero-system over an infinitely long time horizon, this doesn't typically matter in practice. It can be positive sum for participants over some time horizon they care about.

For example, an HFT trader make pennies from each trade by exploiting tiny price inefficiencies. He essentially takes money from a "stupid" retail investor who does not know how to optimize his trades. However, the retail investor may not actually care about optimizing trades and just wants to liquidate assets or make a long-term (10+ years) bet. He is totally fine with throwing away a few dollars because optimizing his trades through complex algorithms would be too much work. Here, both parties win, the HFT trades gets paid because he provides convenience, or liquidity, to the retail trader. The same would apply to any human market maker, it doesn't have to be HFT.

And yes, HFT liquidity may disappear during HUGE market movements due to risk, but it doesn't disappear as long as both parties get what they want and the risk is manageable, which is "most of the time". Of course, HFT has other issues such as the race to zero and unfair advantages for a few central players, and I don't want to defend HFT. But saying that "it's all zero sum" is not correct.

An analogy is your nearest grocery store. They're a market maker because they buy from the manufacturer and sell to the consumer and profit from the spread. Do you also argue that these are all zero-sum and we should cut them all out and connect all consumers and farmers directly? And their liquidity also disappears when black swans (corona) happens :)

Is that always true?

Melon Usk (say) wants to make cars, but he can’t pay for the factory himself, so he forms a company, sells shares in it, and uses the proceeds to build a factory. Now he and his shareholders can make cars, so the shares are worth more.

Who lost money?

this would only be true if it was a closed system. the central banks essentially magic money into existence and put it into the market through convoluted methods.

My understanding is that while all markets are not zero-sum, that high-frequency trade amongst trading firms approaches zero-sum.