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by maxerickson 3502 days ago
Lay out the case for the payouts being obscene.

Probably keep in mind that the nominal value of the stocks changing hands on a given day is hundreds of billions of dollars and that an actively trading counterparty is facilitating the movement of that money. What's fair compensation for that?
1 comments
ethanbond 3502 days ago
How did markets function prior to HFT? They're only facilitating exchange between other algorithms, right? And in that case how is it helpful to the market?

Note I'm actually asking these questions - not just being rhetorical. The whole concept of it seems plainly ridiculous to me but I don't know much about this area.

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yummyfajitas 3502 days ago
How did markets function prior to HFT?

You had 10 very tall loud guys in brightly colored jackets yelling at each other in a pit. Mentally they were running the same algorithms as HFTs, just slower.

Later on you had some fast fingered guys watching charts and mentally running the same algorithms as guys in the pit, just a bit faster.

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ethanbond 3502 days ago
Except the people were exploiting inefficiencies in markets (and still do today). HFT algorithms exploit inefficiencies in servers, ISPs, fiber optic cable, a competing algorithm's implementation, etc.
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yummyfajitas 3502 days ago
And the tall loud guys exploited inefficiencies in trading pits and human perception. Ask yourself why I explicitly described them as "tall loud guys in brightly colored jackets"? Those are not irrelevant details.

HFTs do the exact same thing that pit traders did. They just do it faster and cheaper.

And if you really think they don't provide a useful service, you can very easily NOT buy their services - just change one flag in FIX. The question to ask yourself is why everyone chooses to trade with them.

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

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maxerickson 3502 days ago
Those things can't be meaningfully separated from the market.

Exploiting inefficiencies in a competing algorithm is the same type of thing as exploiting inefficiencies in the mental model of the guy standing next to you. Taking advantage of better market proximity is the same type of thing as drinking less than the other guys in the pit.

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ethanbond 3502 days ago
If you presuppose that the purpose of trading is to make money in and of itself then sure. Of course the real (original?) purpose is more tightly coupled to reality and to real goods exchanging hands. There seems to be a fundamental difference between profiting from the exchange and profiting from the mechanism of exchange.

I'm not asking for how we ended up here. I get that faster = better and 1ms faster is still 1ms better. What I'm asking is what value it brings to the world — specifically the world outside of, historically, the pit, and today, outside of the computers executing trades.

Are goods more accurately priced? Is there more liquidity in the market? Is the market more stable? Is the market more efficient, or is it only the technical implementation of the market that's made more efficient by these? Do these benefits, if they're present, outweigh the cost of things like flash crashes caused by algorithms? If flash crashes hurt all of us, then shouldn't we all be benefited by the algorithms when they're doing well? Do we benefit and by how much?

This is why people want "nerdy HFTs" to be taxed in a special way. Maybe it's because they can't articulate the value or maybe it's because there is no value. I can't see the difference and I can't get anything other than evasive comparisons when I ask what the difference is.

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maxerickson 3502 days ago
Borrowing a point from tptacek, Vanguard has come out and said that they have lower costs due to HFT. Their customers save money over the previous providers of liquidity.

https://www.ft.com/content/ff8c6486-cb37-11e3-ba95-00144feab...

(bounce "Vanguard chief defends high-frequency trading firms" through Google if there is a paywall)

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