> I won't say HFT is the most valuable thing that its practitioners can be doing. I think the (trading) world would operate just fine without all these micro-second level transactions. But they are NOT the next subprime mortgage, and I just hope folks stop commenting on stuff they have no clue about.
Your post is interesting and I learned from it. However you admit that HFT is not the most valuable thing smart people could be doing - this is the reason that many dislike it. HFT provides little value to humanity or society. I do not think this makes me 'misguided' or 'have no clue' and I don't like how this makes it okay for advocates to sweep away concerns about it. We could easily say the same thing: algorithmic trading in itself is misguided: it does not use technology to solve socially useful problems such as global distribution, food production or folding proteins to better understand drug interaction and find cures for disease.
The counter argument to this would be that said efforts help fund more genuinely beneficial work such as their recent work in robotics and proliferation of internet availability globally, but how the net balance of talent productivity plays out is murky. The ad team is a large, multifaceted team inside Google.
Finance guys are much more aggressive about capturing more of the revenue they create in salary and bonuses, while engineers seem to shrug at being "overpaid" while letting proportionally more of their value go to execs, investors and giant cash hoards.
Now if you are talking about ibank traders who HFT are replacing, that is true. Their salary bands are enormously higher than engineer pay scales. Sort of explains why they direct so much vitriol towards HFT.
Remember, that the vast majority of people who make large compensation in a finance firm are essentially sales force. They are selling complex products, financial services, or operations.
IE: You can purchase a stock in Euros in some European exchange, OR you can purchase a stock in Dollars on the NYSE. In both cases, you get the same value.
This equivalence in value only exists because traders perform arbitrage on fractions of a penny over the course of milliseconds. And thanks to HFTs, any divergence in value larger than a penny or so is arbitraged away within miliseconds.
This is a solid service for all involved, and HFTs are the ones who take the risks behind arbitrage. (IE: if the markets move in an unpredictable way)
That and for most people who actually understand the mechanics what is going on, the current system seems way better for the vast majority of people than the one it replaced, so we have little reason to change.
Yet the HFT people are making tons of money. Where is it ultimately coming from?
Most of the money in HFT actually comes from those previously more rapacious middlemen's bonus.
Also curious on your perspective of their role in market making. Do HFTs ever end up buying a larger block than they know is being demanded and end up holding some of the remaining for a time?
1. HFT does NOT take anything from most investors most of the time. Most investors trade on a much longer investment horizon than any HFT firm. If you are a normal investor, you can lump up most of HFTs into the same bucket as the exchange itself. Most of them engage in some combinations of (i) pure arbitrage (ii) very short-termed statistical arbitrage (iii) market-making based on (i) and (ii). None of this is really that relevant to most investors. The only time HFTs can screw over a lot of investors is when their software goes awry. But this is a risk that any computerized system has, high frequency or not. If there is a major bug in Chicago Mercantile Exchange's matching engines, that would be a total disaster.
2. HFT firms do have huge execution risks: if you are making a two-sided market, there is a chance you can get "swept", meaning when the value of the underlying moves faster than you can react, you get filled on one side of the order without a realistic chance of hedging for a profit. HFT firms do a ton of research into estimating their execution risks. (edit: This point is often glossed over, making HFTs look like this evil superpower group of nerds exploiting other investors. That's not the case)
3. Finally, most HFT traders don't go into the profession solely for the money, just like most people do not apply for YC solely for their passion. Most of my former coworkers weren't that greedy and led pretty modest lives despite making hundreds of thousands of dollars. For them, high frequency trading had a locally optimal balance of tackling intellectually challenging problems while getting paid handsomely.
I won't say HFT is the most valuable thing that its practitioners can be doing. I think the (trading) world would operate just fine without all these micro-second level transactions. But they are NOT the next subprime mortgage, and I just hope folks stop commenting on stuff they have no clue about.