[sippingjippers]

It's an ongoing debate, but there are some facts that don't change regardless of stance in the debate.

If you limit HFT, then markets /do/ become less efficient. When two trading venues for the same instrument exists, say, in Europe and the US, there is no benefit to any participant for a price disparity to exist for a long period. If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? Similarly for a seller in Europe, what if you were fleeced 10% because your holdings moved favourably in the moments before you sold?

HFT also makes trading cheaper for everyone. Much of the time these firms are primarily competing with each other. One way that competition manifests is in the bid/ask spread. With firms fighting for order flow, if they can improve their offer by a single cent to ensure price-time order book priority then they'll improve their price. For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans.

There are more aspects I'm not smart enough to discuss, like how HFT basically enables entire asset classes through dynamic hedging. The only reason that option markets exist on most stocks is because there is an HFT counterparty that sold you the option rapidly buying and selling the underlying stock to ensure its exposure to the position was only the premium you paid for the option.

HFTs also provide some market stability, first through increasing liquidity having a volatility smoothing effect, and second through so-called "volatility compression" as a result of option market dynamic hedging causing HFTs to buy when others are selling and sell when others are buying. This one has a darker side as depending on their aggregate positioning, HFTs will eventually begin to dump just like everyone else.

I believe HFTs are also necessary for exchange-traded funds to be priced correctly and function correctly. That's essentially because two markets always exist for an ETF: a primary market between dealers and the fund where creation/redemption units are traded, and the secondary market where regular folk buy its shares. Given the prevalence of ETFs as a retail investing vehicle, if they were mispriced this would be potentially disastrous for individual investors.

Probably a bunch more good reasons for HFT, I'm not sufficiently versed in this stuff

[Scoundreller]

> If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off?

> For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans.

As a Canadian, I take advantage of this to do USD-CAD currency exchange. Most big Canadian companies trade in Toronto and New York, so I can buy in Toronto in CAD$ and sell in New York for US$ because some HFTs are keeping them exactly in sync. All I pay is two trading commissions and a 1-2cents / $100share in spread. So converting $30k would cost me $20 in commissions and ~$12 in spread, so about 0.1% in cost and that goes down for as much as I'm comfortable in doing per trade.

I probably lose a bit more in whatever distortion I've created, but $30k doesn't account for much in their hundreds of millions of $ in daily volume.

[boulos]

Presumably by “trade in New York” you mean there’s an ADR (so you’re still trading within your account, but for a separate security).

Edit: because otherwise you’d need to also wire transfer, right? (Not saying this isn’t rational, just asking).

Looks like all the major Canadian banks are a good option for this (https://seekingalpha.com/article/93201-11-top-canadian-divid...).

[Scoundreller]

Nope, not an ADR. These are cross-listed shares trading under the same CUSIP.

Lots of cross-listed Canadian banks, railways, resource companies and telecoms. Usually I use something high priced to minimize spreads and avoid earnings seasons.

[boulos]

Interesting! Thanks for clarifying!

Edit: And your brokerage doesn't force the settlement funds into your local currency at an exorbitant rate or anything? (I am deeply amused by your backdoor currency exchange)

[Scoundreller]

Not anymore. It’s fairly standard for Canadian brokerage accounts to have a US$ and CAD$ side.

You do have to 'journal' the holdings between them for my broker. This is now possible online, but used to require a phone call.

The big gotcha with this method (depending on your account and broker) is that you might need to wait for your 'buy' to settle (2 biz days I think?) before journalling, so you face some market risk).

The procedure is somewhat formalized: https://www.finiki.org/wiki/Norbert%27s_gambit

[wdb]

Yes, normally takes two days, and can see the reason why they want you to call them beside the client binding :)

[amluto]

Wow, that’s a complicated way to get a reasonable price for forex. 1 to 2 cents per $100 is not actually a particularly great deal — what actually seems to be happening is that your banks are ripping you off for currency conversions but not for stock transactions.

[Scoundreller]

And the other methods of achieving < 1-2 cents/$100 are? For those moving < $10m in a month?

I'd argue at $10/trade, the bank/broker is also ripping off for stock transactions.

[HenryKissinger]

What online brokerage do you use?

[Scoundreller]

Just one of the big banks. I could probably get the commissions down a bit, but I trade so infrequently and like the idea of an office I could walk over to if I had to deal with something in-person.

Sometimes brokers have bribes to get you to switch to them, so I might play that game one-day. $400 or $500 would cover years of trades for me e.g. https://forums.redflagdeals.com/scotia-itrade-new-client-up-...

[shoo]

some online brokers will let you do these forex trades directly (e.g. ibkr)

[Scoundreller]

Oh they all do, but often the rates are terrible (e.g. 1.5% commissions). I know IB has forex rates around what I can accomplish with less complexity, but it can be hard to meet their minimums to avoid monthly fees (especially with Canada's 'tax-free savings accounts').

[wdb]

Yes, normally, these trades heavily depend the currency pair, and the client, quantity, etc. And least that was the case at the bank I worked in the past

[hogFeast]

Er, foreign exchange trades close to $7trn/day. Your $30k doesn't register.

[Scoundreller]

Whole point here is to avoid forex brokers that charge more money than this method.

If you choose a thinly traded cross-listed share, you could end up in trouble.

[simias]

I guess the problem is that the arms race needs to reach a bottom at some point. Sure if prices lag around the world by a few hours, then I can see how it's bad. Here we're talking about boring holes through mountains to shave microseconds off.

Then you see articles that these ones that make my blood boil: https://www.bloomberg.com/news/articles/2019-09-12/global-wa...

> Melting Arctic Means New Undersea Cables for High-Speed Traders

Amazing!

I can't shake the feeling that there can't be a simpler and more elegant solution to this problem, such as settling all transactions on some global discrete "tick" on the scale of a second to let the time for all exchanges to settle on a shared view of the market. The problem is that the incentives right now are not to create such a system, but rather to lay wires in the arctic to trade between Tokio and NY few milliseconds faster.

[sippingjippers]

Order-triggered auctions are slowly becoming a thing, but they have limits too. In this scheme, everyone submits an order and e.g. once every 100ms the exchange will cross them. Very little understanding of them, but they look cool

[amluto]

You’ve made a huge implicit assumption here: that efficient arbitrage requires low latency. It may well be that case that, right now, most of the arbitrage of the sort you’re discussing is done by HFT firms, but I see no reason at all to assume that a market in which latency is less relevant will not be efficiently arbitraged.

There are certainly human beings who manually arbitrage some markets even today, but that tends to be more complicated kinds of arbitrage. The only real connections between latency and trading strategy that I know of are:

Certain strategies don’t work if you aren’t the fastest kid on the block.

Certain strategies are too complicated to do if you are the fastest kid on the block. (For an example of the latter, you are unlikely to succeed in reading news reports, doing complex analyses, and executing trades based on your analyses in 100ns. No amount of money spent on top-of-the-line nVidia gear or tensor processing units is going to change this.)

[sippingjippers]

Hmm, this is true. Another way to think about it perhaps is that, I don't think any race can be avoided just by slowing things down somehow, the rules of the game are only slightly changed in that case, and perhaps not in a way that has any benefit to slower traders.

For example at IEX when they introduced their speed bump, it was to protect their so-called 'mid peg' hidden orders. What they found was that these orders were still the target of adverse selection because some HFT trader could submit speculative orders well in advance, by predicting price movements based on fast information from connectivity to the order books of other exchanges.

That PDF is an awesome read ( https://iextrading.com/docs/The%20Evolution%20of%20the%20Cru... ), but I think it speaks to a more general problem of trying to slow down. Even if auctions on all exchanges only occurred once every 10 seconds, there will still always be an advantage to whoever can aggregate information the fastest and use this to submit a best price at the latest possible moment to participate in the auction.

In my uninformed state, it doesn't seem possible to truly reverse this process, and I'm left wondering what problem would be solved by attempting to eliminate HFT from the markets

[amluto]

That's an interesting read. For what it's worth, I think that IEX's "speed bump" is somewhere between a publicity stunt and a way to circumvent the regulatory rules about NBBO. (I imagine that IEX is not allowed to implement the speed bump in software because they are not allowed to pretend they don't know about an NBBO update. But if they use intentionally slow hardware, then they genuinely don't know about the updates.)

The paper is a bit confusing:

> Suppose at a given point in time, the market has been stable for awhile (meaning the best bid and offer prices have not changed for several milliseconds), and trading venue V has an accurate, up-to-date view of the NBBO in that symbol as $10.00 by $10.02. So the resting buy order is pegged to the midpoint price of $10.01. Now, a seller comes along and trades with all of the buy interest at $10.00, changing the best available bid to $9.99. The midpoint of the NBBO is now $10.005, but this information does not arrive at trading venue V instantaneously. There is a small window of time in which venue V still believes the midpoint is$ 10.01, so if a matching sell order arrives at venue V during this window, it can trade with the resting buy order at$10.01. This is bad news for the initiator of the resting order, because the NBBO has already changed in their favor, and this execution at $10.01 goes against the spirit of what a midpoint pegged order is intended to accomplish.

Now I'm not a securities person and I don't really know the spirit of what the midpoint order is intended to accomplish. But if I were a serious trader and I had a buy order resting at $10.01, I would be rather annoyed at the beginning of this process -- a seller came and sold at $10.00, but my resting buy at $10.01 didn't match the seller. Similarly, the seller should be annoyed that they only got $10.00 and not $10.01.

(I assume this only obeys the NBBO rules themselves because IEX midpoint pegs are non-displayed, but I am not an expert here.)

There appears to be disagreement about what exactly a midpoint order is. Interactive Brokers says:

> A pegged-to-midpoint order provides a means for traders to seek a price at the midpoint of the National Best Bid and Offer (NBBO). The price automatically adjusts to peg the midpoint as the markets move, to remain aggressive. For a buy order, your bid is pegged to the NBBO midpoint and the order price adjusts automatically to continue to peg the midpoint if the market moves. The price only adjusts to be more aggressive. If the market moves in the opposite direction, the order will execute.

Which is rather different.

Personally, I find fancy order types to make the market unnecessarily complicated, and I also think that Reg NMS and the whole NBBO mechanism is well meaning but actually mostly makes the market worse.