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> People seem to defend HFT for some reason (the front running kind, not the necessary arbitrage kind)

I'm not defending the front running kind. The argument is that the front running kind (which is in no way actual front running and is instead latency arbitrage) is the same as, and fundamentally a requirement of the arbitrage kind.

Further, most peoples model of what latency arbitrage actually is, is so flawed as to create strong biases when they shouldn't exist.

grandinj 3792 days ago

"latency arbitrage" ?

The euphemism HF traders use to help themselves sleep at night.

Thats one way to describe it. Another way to describe it is "hey prices at 2 different venues get out of whack some times, when that happens there is an opportunity to make money by bringing them back into alignment".

We don't assume other kinds of middle-men require sleep aids when they do this kind of behavior (and in fact we usually encourage it), so I don't know why HFT folks would need them either.

grandinj 3792 days ago

And confidence tricksters perform trust arbitrage.

This is all just ways of saying HFT is exploiting a loop-hole in a system to make money for themselves.

They could all be eliminated overnight and the free-market system would not notice their absence at all.

They don't provide a service to anyone besides themselves, they don't provide liquidity, they are nothing except parasites.

This is a little like saying the CAP theorem is a euphemism that distributed systems designers use to help themselves sleep at night.

minimax 3792 days ago

... they never seem to answer the question of why someone who is not an HFT firm would want to trade on an exchange that caters to high frequency traders (as basically every exchange does).

There are a number of incorrect assumptions built into your comment (most notably that prop HFT are the only ones using algos to trade), but the simple answer to this question is that those exchanges have larger displayed size at better prices.

> most notably that prop HFT are the only ones using algos to trade

Can you point out where I made that assumption?

cli 3792 days ago

>It can be solved by an exchange that makes trades every second or on some time interval that is minuscule to a person but enormous to a computer.

I do not see how that will solve the problem. Suppose firm A and firm B both want to buy stock X at prize Z. There is only enough X at prize Z for one of those firms. Both firms send their trade orders withing milliseconds of each other. In your time interval scheme, which firm gets to buy the stock?

CyberDildonics is basically proposing frequent batch auctions as described in the Budish paper. It won't work, largely for reason you state. The appropriate solution is for exchanges to add a _random_ delay to each order (emphasis on _random_, a fixed delay a la IEX does nothing). ParFX is doing just this.

Random delays already exist. The infrastructure of every exchange introduces them. Its a standard part of any HFT model to think about what happens when you hit one. It certainly doesn't remove the speed game.

I think a better way to change exchanges is to dramatically decimalize the price levels. Right now the difference between 2 price levels a) adds a floor to the minimum spread and b) prevents strategies from truly competing on price requiring them to compete on time.

minimax 3792 days ago

I think a better way to change exchanges is to dramatically decimalize the price levels.

The idea that reduced tick sizes would force traders to compete on price rather than time is a popular HN market microstructure solution, but it's wrong or at least partly wrong.

1) Liquidity taking strategies will still "compete on time" in order to trade at the most favorable prices. Market making strategies will still "compete on time" in order to avoid getting picked off.

2) Inverted fee venues and midpoint order types offer sophisticated traders the opportunity to trade at prices within a 1 penny spread. If you watch the tape for a stock like ZNGA you will see this type of trading.

3) There are a number of high priced / high volume stocks that don't trade at a penny spread. GOOG is a good example. Do you find GOOG trading to be somehow cheaper, more orderly or efficient than e.g. MSFT? The GOOG spread is almost never a penny and is regularly over 20 cents. If the benefits are there, they ought to be obvious.

First, let me make it clear, I don't view market participants competing on time as a problem and physics means it will always be a component of the price of the risk associated with trading. But if we are going to be making changes to markets, I'd much rather change the pricing requirements than adding esoteric random time differences, or assuming batch auctions will make things better.

The reason I like reducing tick sizes (and I mean dramatically like 1/1000th or more) is less about the bid ask spread at the middle, but rather the competition at the +1 levels. A lot of the latency advantage right now is in being able to cancel a few levels near the midpoint while leaving tons of other orders stacked.

Reducing tick sizes would make these deep stacking strategies less viable, which seems (though I have no proof) like it would make the positions of the market makers less risky in a systematic way.

As for GOOG vs MSFT, I think that is obviously explained by the much higher price of GOOG right? Nothing is going to make holding a stock that costs more less risky, even speed.

minimax 3792 days ago

I thought you were making the argument that reducing tick sizes would reduce the amount of effort put into reducing latency (or reducing the overall amount of prop HFT volume), but I guess I was wrong about that. The idea that reducing tick sizes would ultimately reduce market maker risk by making certain quoting strategies less viable is interesting.

Let me clarify: my random delay shuffles incoming orders, while random exchange delays (outside of CME iLink games) do not. Removing determinism hugely hurts speed.

The value of further decimalization seems questionable. It would in all cases reduce displayed size. Would transaction costs still decline due to tighter spreads? For the liquid lower-priced stocks, probably. For stocks whose natural spread is > 1 cent (most of the expensive stuff), certainly not. For everything else, hard to say.

Maybe a Japan/Europe-style tick increment schedule is a good compromise.

If there is more demand than supply, wouldn't you expect the price to go up?

You're not allowing it to, because your proposal quantized the market! That's what it means to batch trades and execute them at an interval: the price can't change inside that interval.

So you cancel the order, raise the price and let it go another cycle. Why wouldn't the seller want that?

Yes, but now you haven't accomplished what your proposal sets out to do, because the fastest people to the quantized order book get the best prices.

How? In every quantized unit of time everyone would be treated equally. If there is more demand than supply the prices goes up until there is not more demand than supply. This is also not even taking into account orders having ranges acceptable prices, which would add much more flexibility and granularity without needing more temporal resolution.

> they never seem to answer the question of why someone who is not an HFT firm would want to trade on an exchange that caters to high frequency traders.

There are network effects in trading: people go to transact where everyone else is transacting. Because HFT is allowed on the most popular venues, the economic thing to do is hold your nose and trade there too. This is true even if HFT somehow makes the venues "worse" (which it doesn't).

If HFT doesn't make those venues worse, then how are they making money?

Makers collect the spread from participants who want to transact right now (the price of immediacy). "Real" investors are better off because they paid someone to take a position of their hands that they didn't want. They made their trading problem someone else's.

Takers exploit the option value of resting orders by trading when "fair value" moves but those orders don't. "Real" investors are better off because they cheaply acquired a security they may hold for years (the fact that the price will shortly move against them by a penny or two is irrelevant). Market makers are worse off--but they're HFT guys, and it's not really your problem.

Do "real" traders want microsecond immediacy? I would think a person would rather have a better price, even if it means waiting a whole second.

https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...

yummyfajitas 3792 days ago

There is a simple flag you can set (it's called "Add Liquidity Only" or "Post Only", depending on the venue) which will result in HFT's never trading with you. Strangely, most "real traders" never set this flag.

The reason is that it's not a matter of waiting a whole second and being guaranteed a fill. It's placing an order and accepting execution risk; maybe you get a fill, maybe you are stuck holding a tanking stock.

mrchicity 3791 days ago

If you define HFTs as passive spread/rebate-capturing single instrument market-makers, then yes, but many prop HFTs operate a "hybrid" model where they sometimes cross the spread to flatten their book, or cross if an arbitrage presents itself. There are even HFT strategies that are primarily liquidity taking.

Obviously not. Humans just want something that feels like "now." That this has changed from seconds to milliseconds to microseconds is an inevitable consequence of the rules of the game--and is completely irrelevant to you. Your horizon is much, much longer than that of the professional trader to whom these details matter.

So a professional trader is not a person and they do care about microsecond as opposed to seconds? That sounds like a bot, not a person.

If they didn't, they aren't required to pay for it. If they want to wait they can. Better yet, if they want the exchange to wait for them until the price gets to be what they want, they can do that as well, without paying for any immediacy at all.

andylei 3792 days ago

when there was no HFT and market makers were humans, you had to wait a long time for your trades AND spreads were huge (aka, prices were worse).

You are making an assumption that computers mean high frequency trading. We can use computers to trade without having high frequency traders.

The same way market makers have made money since prices were literally printed on a stream of tape: by outcompeting other market makers to capture spreads.

They get paid to bridge demand over time. By efficiently doing this they can make the venues better in aggregate and still make money.

Does the demand between millionths of a second need to be bridged?

No, there is probably nothing especially productive about pricing things at that level of granularity. But speed is a reasonable figure of merit that allows different algorithmic trading firms to compete for the business of making markets, rather than having all of market-making owned by one of the big investment banks.

No, but by being able to react fast they can price what the service of bridging more efficiently, and thus more cheaply to those taking part in the service.

How is that not circular logic?