[T_S_]

Accurate article? Yes I think so. Hairsplitting? A bit. Any content about the big picture? Afraid not.

Algo trading has been around longer than HFT. It was invented to protect the information that that a big order was being executed. This avoided the risk of front running by handing the order to humans or scaring liquidity providers by executing it all at once.

HFT came about when computerized exchanges began to compete with each other for business. Nowadays you go hunting for liquidity. Speed differentials are more important.

I think the OP is likely to agree up until here.

Today HFT in its worst form amounts to high speed computerized rumor mongering. You game the market by bluffing orders and trading faster than your customers. The regulators will never catch on and try to fix it even thought the remedies are many and simple. Moreover our attitudes about who owns information make it very difficult for us to even consider these simple solutions.

[reverend_gonzo]

There are a massive number of HFT shops. Most of these are prop-shops rather than funds, as in they trade their own money and don't take investors. They are physically unable to front run their customers because they simply don't have customers.

I will give you that there are some big banks getting into HFT now, and that's a different story, but a statement like "HFT in its worst form amounts to high speed computerized rumor mongering." is wildly inaccurate and shows a complete lack of understanding of the industry.

Furthermore, there is a massive difference between algo trading and HFT. Technically speaking, yes, HFT falls under algo. However, HFT is about speed and making very little profit many times throughout the day, usually by providing liquidity.

Algos on the other hand, especially things like high end models aren't meant for HFT because they take larger amounts of time to run (ie: backtesting). These are used (for example) to determine misprices in the market that will pay off heavily in the long term, or (as others have mentioned below) to buy/sell a large quantity of shares in a way that it won't move the market in the other direction, rather than make an immediate, albeit tiny, profit.

[T_S_]

I understand the industry quite well and from experience. BTW My only daggers were aimed at HFT.

Let me be clear. Anybody that puts an order in not expecting to get executed but to create favorable conditions for their next order is engaging in what I call "high speed rumor mongering". There are lots of variations of this game. Never happens? Always happens? You tell me.

But markets aren't chess. "Rumor-mongering" is a legal term I chose on purpose. It is generally prohibited because it destroys liquidity in markets, which hurts investors and issuers. The term is intentionally objectionable, but not inaccurate. Just don't trouble the regulators to figure it out.

[mcphilip]

OP's misunderstanding of prop trading vs funds aside, I still think it can be argued that "HFT in its worst form amounts to high speed computerized rumor mongering".

For instance, take a look at the Nanex article What is the Bid/Ask spread of this stock? [1]. Rumor mongering in this case being gaming the weakness of the NBBO.

On a side note, I highly recommend reading through Nanex's Strange Days research section if HFT related market anomalies interests you at all [2].

[1]http://www.nanex.net/Research/bloodbot/bloodbot.html [2]http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html

[yummyfajitas]

You game the market by bluffing orders and trading faster than your customers.

Could you explain the mechanics of "bluffing orders"?

If by "bluffing", you mean "layering, that is illegal. Also, HFT's are usually the victim of layering, not the perpetrators.

http://www.reuters.com/article/2010/09/13/financial-trillium...

[getsat]

> The regulators will never catch on and try to fix it

Can you elaborate a bit (even at a high level) about why HFT is particularly bad? I always hear everyone deriding HFT, but never any specific reasons why aside from people complaining about them not contributing anything to society.

[Retric]

The major issue is HFT can create wild market swings with little to no basis in reality. It's actually possible for them to suck up all the outstanding bids over a few seconds using small amounts of capital and while a human might desire to sell if a stock goes up by 2% the seconds or minutes it takes US to make that choice is eons for the algorithms. The net result of this is actually less liquidity as someone buying or selling can't place large orders on the market or the algorithms with eat them alive. Also, they are often setup to simply stop all actions if the market deviates to far from the norm which pushes things even further out of whack.

[getsat]

Thanks for the reply.

Are HFT firms really doing enough volume to even move the needle, or are they simply targeting lower end stocks/securities? I guess I'm still in a forex mindset where billions is not considered an especially large amount.

[msellout]

Recent reports say that the majority of trading volume in the US is HFT.