[misja111]

> All this HFT feels wasteful and bad for 'regular' human investors.

Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc.

I used to be a market maker in the 90's before HFT took off. The margins we kept sometimes felt like a rip off but customers had no other choice but to accept them.

People who ask for transaction fees, forced delays in executing or whatever, tend to forget that these force market makers to increase their spreads, which means customers eventually pay the price.

[Shrezzing]

>Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc.

It's not automatically the case that the disappeared margins & thinning of bid/asks have been shared equitably between the trading firms and customers.

Take two exaggerated markets for example:

1) No HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. A market maker charges the customer $5 to access the 100 shares at $1 each. The customer pays $105. The market maker earns $5.

2) With HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. The customer clicks "buy" on their trading platform, the HFT races to the $100 shares, and purchases them, then fulfills the order at $105. The customer pays $105. The HFT firm earns $5.

For the end-customer, all that's happened is the margin goes to another firm. The consumer still has no other choice but to accept these transaction fees. There was arguably a need for HFTs to reduce the market-makers exorbitant fees in the 2000's, but that requirement has been served, and the technology now exists to remove both from the market entirely.

HFTs are a rent-seeking entity interjecting in a market which, at least in theory, exists to most efficiently allocate capital to the productive benefit of all.

[thinkharderdev]

In the United States at least both scenarios you mentioned are illegal. Market makers are not just sitting in the middle of orders. They buy without a seller lined up and then fill orders from their own inventory (or route orders to an exchange in the case where they can't fill a buy order from their own inventory). In cases where they route to an exchange they are required by law to fill the order at the lowest price available. Typically they fill orders at better prices than what you can get on an exchange. So you, as a retail investor, are actually getting better prices than you would if your broker just filled orders on an exchange.

How the price improvement gets allocated is complicated. Some of the price improvement goes to the broker (in the form a payment-for-order-flow) and some goes to the actual investor (you). But in either case the retail investors are strictly better off.

[Shrezzing]

Latency Arbitrage still exists in a world with NBBO regulations. Research consistently finds that not only does the strategy work in theory, but that it is consistently put into practice by HFT firms to the detriment of other market participants. If a firm can calculate the NBBO ahead of other market participants and the market regulator, it can still legally front-run the market, and risklessly extract rents from end-customers. The NBBO formula is not computationally expensive, and its underlying data is necessarily publicly available to all trading firms. This occurs in the real world, in the order of $billions annually.

The UK's Financial Conduct Authority:

>We use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.” The key difference between message data and widely-familiar limit order book data is that message data contain attempts to trade or cancel that fail. This allows the researcher to observe both winners and losers in a race, whereas in limit order book data you cannot see the losers, so you cannot directly see the races. We find that latency-arbitrage races are very frequent (one per minute for FTSE 100 stocks), extremely fast (the modal race lasts 5-10 millionths of a second), and account for a large portion of overall trading volume (about 20%). Race participation is concentrated, with the top-3 firms accounting for over half of all race wins and losses. Our main estimates suggest that eliminating latency arbitrage would reduce the cost of trading by 17% and that the total sums at stake are on the order of $5 billion annually in global equity markets

https://www.fca.org.uk/publication/occasional-papers/occasio...

The University of Michigan's Economics department:

>We illustrate this process and the potential for latency arbitrage in Figure 1. Given order information from exchanges, the SIP takes some finite time, say δ milliseconds, to compute and disseminate the NBBO. A computationally advantaged trader who can process the order stream in less than δ milliseconds can simply out-compute the SIP to derive NBBO,a projection of the future NBBO that will be seen by the public. By anticipating future NBBO, an HFT algorithm can capitalize on cross-market disparities before they are reflected in the public price quote, in effect jumping ahead of incoming orders to pocket a small but sure profit. Naturally this precipitates an arms race, as an even faster trader can calculate an NBBO* to see the future of NBBO, and so on.

http://strategicreasoning.org/wp-content/uploads/2013/02/ec3...

The Bank for International Settlements:

>Conservative estimates suggest that at least 4% of dark trading occurs at stale reference prices. High-frequency trading firms (HFTs) almost always benefit from such stale prices, being on the profitable side of the trades between 96 and 99% of the time. Furthermore, stale trading does not happen at random but is driven by the behaviour of HFTs. HFTs as a group almost never provide marketable liquidity in the dark and rather behave strategically to exploit their speed advantage by submitting marketable orders to execute against stale quotes.

https://www.bis.org/publ/work1115.htm

[gpderetta]

What you described is not latency arbitrage.

[Shrezzing]

I described the canonical front-running example in my first comment, as it gives most non-finance readers a quick overview of how HFTs work, without needing to describe regulations, strategies, NBBO, SIP, etc.

The specific strategy currently employed by HFTs is somewhat immaterial in the broader context of a discussion about front-running. For as long as a firm can legally front-run the market with any strategy, it can undermine the market and risklessly extract profits.

[WiSaGaN]

The cause of latency arbitrage is not HFT, it is the fragmentation of liquidity.

[mtoner23]

This is entirely false and ignores Reg NMS. Everyone must execute at the NBBO. As well customer orders are often given better and tighter prices than other market participants. HFT firms will often offer them better than NBBO prices. As well, none of these prices you quote would not exist without market makers, its just now the fact that to be a market maker you must be an HFT firm as well due to the scale that is now required.