[kasey_junk]

"1) This doesn't address the front-running issue. (Where different exchanges receive the buy/sell order at a different times and HFT can abuse those microsecond differences)"

This is only an issue if your order is large enough to take out the entire liquidity of one of the exchanges. If that is the case, by definition you are not a retail investor, you are an institutional investor and part of the value add you are supposedly adding is your ability to operate in a complex market.

"2) It's a universal truth that people who are better informed are harder to rip off. So that's not very persuasive. You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity service they may not even want."

So informed market participants should subsidize ignorant ones?

"3) It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. And if transparency with regard to HFT trading strategies leads regular people and sophisticated investors to make different decisions, then that means that the lack of transparency worked in favor of HFT. Therefore, it's reasonable to assume much of the HFT profits are just an externality. The decline of HFT is in part because investors are getting wise to the shenanigans."

Agreed. We should also have that discussion around dark pool operators, hedge funds, and investment banks. While we are at it, lets talk about photo sharing websites and internet chat services as well.

[KingMob]

We already regard some profitable activities (e.g., slavery, child labor) as unacceptable, so there's no reason a priori to rule out considering whether HFT falls in the category of "too detrimental to society to allow".

Likewise, the more esoteric forms of finance (CDS) and the people who made them and continue to game the system greatly contributed to the recent recession without suffering any of its ill effects.

And furthest down the chain of societal damage are photo sharing sites and chat services, which mostly just waste time and supplant the revenue of film/phone companies.

If you're implying that considering HFT's societal worth is as silly as examining photo sharing services, you're mistaken.

[kasey_junk]

"We already regard some profitable activities (e.g., slavery, child labor) as unacceptable, so there's no reason a priori to rule out considering whether HFT falls in the category of "too detrimental to society to allow""

I agree, I think a robust conversation about the pluses and minuses of electronic trading are of value, and there is nothing sacred about electronic trading activities that means they are a natural right. That conversation needs to be an informed one though, and discussions about HFT never are.

"Likewise, the more esoteric forms of finance (CDS) and the people who made them and continue to game the system greatly contributed to the recent recession without suffering any of its ill effects."

This is a point that is most aggrevating about the narrative that Michael Lewis is pushing about HFT. The people being "hurt" in his hypothesis, are in fact the people who create esoteric forms of finance. The big institutions are upset by HFT because it has cut into their profits, not because it is unfair.

"And furthest down the chain of societal damage are photo sharing sites and chat services, which mostly just waste time and supplant the revenue of film/phone companies. If you're implying that considering HFT's societal worth is as silly as examining photo sharing services, you're mistaken."

WhatsApp was sold for 19 billion dollars. That is about exactly what the entire HFT market was worth in it's very best year if you believe very inflated stats.

[KingMob]

"This is a point that is most aggrevating about the narrative that Michael Lewis is pushing about HFT. The people being "hurt" in his hypothesis, are in fact the people who create esoteric forms of finance. The big institutions are upset by HFT because it has cut into their profits, not because it is unfair."

Yes, this was definitely glossed over in the article. But some of those large investors are things like pension funds, which hold ordinary people's savings. I'm not sure to what extent that trickles down though. Also, what about the flash crashes?

[kasey_junk]

Pension funds are operating more cheaply now than at any time in history. It is a myth propogated by large bank trading desks that HFT profits come from pension funds. Instead they come from trader bonuses that are no longer necessary.

As for flash crashes there are 2 answers to that question 1) they correct so fast that they impact very few people. 2) if exchanges would stop busting trades during crashes the practices that lead to them would stop.

[gizmo]

1) Chris claims "The fact of the matter is that HFT’s can’t rip you off.". Front-running[1] is an example where HFT's do rip people off, simply because they didn't know it was going on. When the performance of institutional investors is harmed in this way that harms everybody with savings or a retirement fund. Not just the guys at wall street.

2) Straw man.

3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable.

Edit:

[1] Again referring to the technically legal version of "front running" as used by Michael Lewis where HFT abuse buy/sell orders arriving at different times at the exchanges.

[throwaway13qf85]

Front-running[0] is where a stockbroker abuses the relationship they have with a client to place their own order in front of a client's order, because they know that the client's order will move the market, and that subsequently they'll be able to close their own position at a profit.

Having a speed advantage over other market participants and using that advantage to pull your quotes on another exchange is not front-running! It's just sensible market-making, of the kind that has been doing on for hundreds of years. It's no better or worse than sending a pigeon over the English Channel in 1815[1], or using the Transatlantic Telegraph to outpace ships in 1866.

Also, shouting "straw man" is not actually an argument.

[0] http://en.wiktionary.org/wiki/front_running#English

[1] http://en.wikipedia.org/wiki/Nathan_Mayer_Rothschild#Legend

[001sky]

Front running is a conceptual variation of the hold-up problem. Like any concept, it can be implemented in plain-vanilla as well as syngthetic variants. Non-vanilla is not dispositive.

[yummyfajitas]

When you tell a broker "trade on my behalf" and he trades first, that's front running because he is obligated to do what's best for you. Other market participants do not have the same duty.

To make an analogy: my boxing coach is obligated to give me good advice and he's a jerk if he doesn't. The other boxer is not being a jerk if he feints and then punches me in the face.

[fauigerzigerk]

And what if your broker routes your order through an HFT for a fee so the HFT can front-run you? That's what some say is happening. I'm still unclear if I can really believe that because it sounds so obviously illegal.

[yummyfajitas]

Retail brokers often have ELP programs where an HFT has the option to fill your order (and the obligation to do so a certain fraction of the time, typically 20-50%) and avoid paying routing fees.

There is little opportunity to front-run in this case since a) no one on ETrade moves large blocks b) ETrade wants to make sure the ELP program is full of benevolent market makers and c) fill rate requirements. You can always opt out of these programs (turn off "smart routing" or something similarly named), but most people don't since they typically reduce your costs.

[kasey_junk]

That's what I was hoping Flashboys was going to be about. I haven't finished the book yet but so far Lewis mentions it in passing but doesn't dig into it.

[rayiner]

> 3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable.

The question: "does Facebook spying on teenagers to help Abercrombie & Fitch sell them crap they don't need add social value commensurate with how much money they make doing it?" isn't an attempt to change the subject, but rather a glib attempt to criticize the structure of the question. Since when do we judge compensation based on value added to society, and if that's what we do, why don't we apply that approach beyond finance?

[gizmo]

I disagree. It is an attempt to change the subject from the object level: "is HFT harming society and do we need more transparency or regulation" to the meta level: "if we have to do something about HFT, then why not address X, Y, Z also?".

It's not a legitimate argument because it can be used to derail any conversion that criticizes one particular aspect of society.

It goes without saying that there are moral questions to be raised about facebook acquisitions and compensation in fields outside of finance. But it's not part of this conversation.

[rayiner]

That's not the argument. The argument is: "if this mode of reasoning is valid, and pursuant to it we must do something about HFT, then we would also feel compelled to do something about X, Y, and Z as well. But because we don't feel compelled to do something about X, Y, and Z, that implies that the mode of reasoning is not valid."

In other words, he disagrees with the premise that compensation need bear some relation to economic value created. Empirically, that's a premise that we as a society reject.

[kasey_junk]

See I think the question "is HFT harming society and do we need more transparency or regulation" is much clearer and easier to debate about than "does HFT make more money than it's value to society".

When we have that debate I'd like it to be informed about what does and does not actually happen with HFT and not bogeyman scare stories. I'd also like that debate to consider the pro's and con's of the system it replaced and the unintended consequences of any regulation we introduce.

[hsitz]

"Since when do we judge compensation based on value added to society, and if that's what we do, why don't we apply that approach beyond finance?"

We apply it in finance for a couple reasons. Securities exchanges are high regulated entities, at least since the Great Depression brought our country to its knees. Ever heard of the SEC, which exists to protect investors? There is no reason for HFT to be allowed at all unless it is creating a net benefit for society. Or said another way, if HFT provides a benefit only for the people doing HFT, and has a negative effect on others, then there's no reason to allow it. (An aside: My understanding is that studies have shown markets to have plenty of liquidity without HFT.)

[notahacker]

In response to (1), I always assumed that people talking about the "little guys" being ripped off were generally talking about the little guys holding money in institutional funds whose trades were being front-run rather than the professional money managers themselves. Of course, in most cases these "little guys" are probably being ripped off far more by the fund management fee, but still...