I've been out of the HFT business for a while, so i guess things have moved on.

I'd previously done a lot of work in embedded SCADA systems (hence the fit for working with with FPGAs in HFT).

I left mainly because I genuinely felt that there was a certain futility with ultra low latency trading...it's less about trading and more an arms race between quants and techies of different companies, all with deep pockets.

I guess embedded SCADA systems are my comfort blanket :-)

Could you explain, indirectly or without identifiers, why now is different than back then?

A good example might be - imagine you are a car dealership, so serving as a rough approximation of a market maker. What kind of entities do you want to trade against? Other car dealerships (informed counterparties), or your average suburban minivan owner (uninformed counterparties)?

It's immediately obvious - the rationale is that when you trade against uninformed order flow, your measure of adverse selection is far lower than if you trade against informed order flow. Your average suburban minivan owner is going to be more time-sensitive and price-insensitive than another car dealership who is willing to look high and low for better deals.

Adverse selection, in this context, is that of the orders you're offering to the market, only the subset which have the greatest likelihood of immediately losing you money are selected. From the perspective of your counterparty, they will only lift your offer if they think it will make them an immediate unrealized profit. Keeping track of your adverse selection is an extremely important part of HFT - in fact, HFTers will try to identify informed vs uninformed order flow and only try to trade against the latter, to reduce immediate unrealized losses due to adverse selection.

This is why PFOF (payment for order flow) exists. It's because companies like Virtu think that traders on RobinHood have no clue what they're doing, and they [Virtu] can come in and eat all the alpha. Virtu doesn't frontrun RH orderflow - instead, they get what's called "first look" at the flow. They get to decide to either immediately fill the offer, or let it hit the real market. From the perspective of a RH user, this is really no harm, because whether Virtu trades against you, or your offer gets lifted against the broader market, doesn't really matter to you.

So my inner self says that these are red herrings, or false flags set by 'real players' to lead the stampede into your living room.

It feels like there's never been a better 'cover' than r/wallstreetbets for firms with real capital to put material volume behind names that would in other scenarios be extremely suspect, or near manipulation. Now you can say, 'see, retail said they like AMD, AMC, etc... (THE STOCK)" because, yes, some random user with karma can now be the input to your 'algo' to move $name_of_stock, or generally, SPY calls / 'poots' in size wildly impossible otherwise.

Humbly, I think it's brilliant

[Edit] to put this comment in context of my response to another poster, I believe the macro can be independent of the micro (aka many little names can get blown up while your main indices maintain some sense of normalcy).

Your statement that HFT firms think that retail traders have no clue what they're doing is a complete misrepresentation of the intention behind PFOF. It's not at all that we think retail traders are idiots, it's that retail orders are usually not coordinated and sustained activities the same way that institutional orders are. If an institution is buying and I sell into it, it is quite likely that the institution will continue buying more and more over a long period of time which increases the duration of my exposure to that institution's order flow. Furthermore it's unlikely that institutional order flow on the continuous market will balance out with other institutional order flow, since in situations where such an opportunity exists, brokers for said institutions will arrange for a block trade or use auctions instead of the continuous market. So trading against an institution means assuming exposure for an extended period of time.

With retail orders, usually a trader buys with a few orders in a way that's typically uncoordinated with other orders and that's it. I don't need to be worried that if I sell to a retail trader that a whole bunch of further traders will follow behind them in the same direction, increasing my exposure.

This is not to say that institutions know what they're doing and retail traders don't, or vice-versa. An institution may have no idea what they're doing and pissing their money away and I still won't want to trade against it simply because as an HFT firm my goal is to lock in a spread as quickly as possible as opposed to speculate on the long term prospects of a company. If anything, to the extent that there is an open secret in this industry, it's that institutions don't perform much better or have much of an advantage over anyone else. That said even if they did it wouldn't matter one way or another, what I care about is that the order flow that I am trading against can balance out over a short period of time so that I can lock in the spread.

It is precisely because retail traders are behaving in a coordinated manner on meme stocks that my firm and all the other ones I know about are not participating in them. Retail flow on meme stocks is often coordinated, at least implicitly so as an HFT firm you may risk holding a significant position for a long time, which is not ideal.

That said the market is very big and the meme stocks constitute but a tiny fraction of a fraction of the activity. It's not a particularly big deal one way or another.

In broad strokes, the things that hurt market makers the most are long winded price trends and accumulation of inventory. So generally MMs can and often will eat large initial losses (depending on how many wings they happened to have owned at the time) when huge volatility spikes happen but when the raised volatility stays at that level for some amount of time (you’ll sometimes hear this referred as market “regimes”) and the MM was able to not blow out from the initial spike they’ll more than make up their losses from the good trading environment after the fact.

Market makers as a whole were suffering during the mid 2010s when volatility was low year to year, correlation with SPY was high, and all the indices basically just went straight up every month.

All systems have waste, some more and some less. This is unavoidable. So the discussion might be more productive if it was framed like this: Which system provides more benefits with less waste? Would frequent batch auctions lead to less resources being spent on wasteful racing, and more resources performing useful services for other market particpants?

Or if we zoom out even more, the two main purposes of the market is allocating capital efficiently to businesses, and redistributing money from the working population to retired people (401k, IRA). And we can ask which market structure will make it better at these tasks?

Framed like this it becomes natural to look at the other side of equation. Instead of asking which structure would screw over HFT's the most, we can ask which structure would be most convinient for say index funds or other mutural funds. And which structure would be most convinient for the individual stock picker. We could even start to ask which structure would help HFT's provide more liquidity with less risk.

Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.

You thought wrong. While there are a variety of things that HFT firms do, most of it is market making.

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

Well, I guess semi-regulated.

https://medium.com/automation-generation/15-well-known-high-...

They're also regulated in various ways.

https://www.nyse.com/markets/nyse/membership

An analogy might be something like Uber and Lyft competing with each other for clients and drivers. From the perspective of everyone else, it doesn't matter much if they ride Uber or they ride Lyft. But the adversarial games that they play against each other [Uber and Lyft] are beneficial to both riders and drivers. Perhaps a duopoly isn't the best example, so you may extrapolate this to any industry where there's a sufficient amount of participants to keep things competitive.

Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.

Trading has never been a vanilla/boring business and it likely never will be either.

True but not something that I find compelling. If you can only compete on price in penny increments, then you'd have to be hugely more confident to undercut a 1c spread with a 2c spread; if you could offer a 1.8c spread by taking a little more time over your calculations, that would change things.

> Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat.

I mean yes, to the extent that there's profit in it at all. But the profits have already been shrinking year-on-year. Plenty of mature industries like supermarkets are utterly cut-throat, but don't bother regular people.

> Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.

Well, it's the same thing, like the project management triangle - you can always trade quality for speed and vice versa, the hard part is when you want to improve both. But I do agree that at this point a lot more of it is known quantities and techniques.

> Trading has never been a vanilla/boring business and it likely never will be either.

My sense is that it's no longer where the best and the brightest go (and as I said before, profits are shrinking a lot). More and more of it is commodified. Which is what we should expect from any industry, honestly - at some point things are new and exciting and profitable, then they become mature and less so.

Add to that the fact HFT are profitable and they must therefore provide negative economic value. Either the seller or the buyer is failing to capture value.

Your understanding of HFT is wrong as well. It's not all low latency arbitrage. It's also execution finesse, risk management and ML-heavy. HFT firms will still be extremely active under this new market structure.

“Very short time-frames for establishing and liquidating positions.” strait from the SEC: https://www.sec.gov/marketstructure/research/hft_lit_review_...

Now it’s true an individual stock may only see 5 trades per day from a HFT algo, but theirs more than just one stock. The larger pool of money sitting around waiting for those 5 trades the lower your ROI. So, the obvious strategy is to reuse the same pool of money to back multiple different strategies.

Anyway my point is that it's wrong to think that HFT are going out of business with this change because it's a fundamental misunderstanding of HFT. There's almost always an ML component and always an execution component and these two skills are going to be critical to profiting off the new market structure. Citadel, Jump, Tower, you name it. I promise you they will be all over this new structure.

I completely agree, and they are going to use the same tools. The question is if this change is a net positive trade for the economy, and that I don’t know but I have heard reasonable arguments in favor.

The slower a market maker is, the more risk they take on when they quote, because they are more likely to be caught by market moves - less likely to cancel their quote when the market starts moving, less likely to be able to hedge if they get filled at the start of a move. To make up for that risk, they have to earn more per trade. The only way to do that is to quote a wider spread [1]. That means that real money participants end up paying more when they cross that spread.

The value captured by HFTs has not come from real money participants, but from other, slower, market makers, and they have shared that value with real money participants.

[1] Or to demand a bigger stipend, or steeper maker-taker pricing, from the exchange, either of which means bigger fees for other participants.

Wouldn't markets function better if every participant had a reasonable amount of time to make decisions?

Contiki, SLIP, PPP, or maybe some ethernet expansion ?

They use linear models and soft cores. Plenty complicated for the kind of arb you could get executing 500ns tick to trade better than the next firm.