When i finished my theoretical Physics PhD, HFT was THE way out of academia for making money in my field. I didn't follow this path as it felt at the time a pretty evil thing to do.
Some people argue that HFT provides liquidity for retail investors, but it's debatable whether that liquidity is real or not since it'll be gone during black swan events. At the same time HFT profit from uninformed/retail flow. So it's debatable wether the actual activity provides values. I'd say probably not.
But there can be indirect value in working in HFT, just like there is with other demanding jobs. There's interesting systems and ML research going on in the field - that's knowledge you can take with you and share with others. Some time ago, HFT was driving a lot innovation in networking, infrastructure, and systems.
Also, over time I've come to realize that "providing value" is really difficult to quantify. Does working in Academia provide value? Maybe if you get lucky and publish something that actually turns out useful. The majority of academics publish papers that are nothing more than noise - negative value. Does working at FAANG provide positive value to society? Again arguable. You may inadvertently end up promoting ads and misinformation. Not everyone does - but it's not guaranteed that you don't without realizing.
"Providing value" is subjective and most of the time it's nothing more than a story people tell themselves so they can feel good about themselves.
I'm not an economics or finance expert, so I may not have a very extensive view of this, but I think there is a meaning to the expression of providing value. If a product has more value to a person than the price of the product, assuming they have correct knowledge, that is the creation of value. In high frequency trading, or stock trading in general, people may be willing to pay more than the listed price, but I don't think value is created because this is generally due to incorrect knowledge. I think stocks are pretty much a zero sum game. If one person is making money, someone else is losing money.
As I mentioned, I'm not an economics or finance expert, so I'd be interested to hear what more experienced people would have to say.
HFT may not, but trading itself definitely provides positive value. People's utility function is not purely monetary over an infinite time horizon. Trading allows you to trade off price and risk over multiple time horizons.
For example, a trade where someone needs to convert his assets into cash due to a family emergency benefits both sides. The person with the emergency takes liquidity from the market and pays a premium because the trade is time-sensitive - he needs cash the next day. Other liquidity traders may profit from such "uninformed" flow in the long term, but both parties are happy because they got what they want.
Another example is trading off risk and hedging against certain changes in the world that would affect you.
I disagree. Trading may seem zero sum on a short timescale, but over the long term markets (empirically) trend upwards. Thus, simply being invested in diverse indices should yield some positive return in the long run. This makes sense as long as we assume GDP growth over time, which is an assumption that has kinda been baked into government/economics to my understanding.
At a short time scale, yes there tends to be a winner and a loser, but even then it's not so clear cut. Most of the trades happening at a short time scale are institutional rather than retail (i.e. people who have the risk tolerance for this type of trading & who have profited enough from it to keep doing this type of behavior). The activity of most HFT firms is some combination of market making & arbitrage, where the profit can be thought of as a fee for trading for other participants (e.g. Robinhood doesn't charge commission but sells order flow, which tends to be cheaper than commission per trade). In general, price improvement is also possible since these make markets more efficient, so as an example it would not be unusual to see firm A sell to firm B who sells to firm C, where both A & B see a profit from their sales. This is possible because prices across markets are not automatically synced, so A has access to a better price than B who has access to a better price than C. And because institutional trading dwarfs any kind of retail trading, the trades can appear high frequency from the perspective of the HFT firm while only occurring, say, once every six months from the perspective of the retail trader.
Regarding the short term versus long term, I agree with you here. I meant to differentiate between getting profit by investing, which certainly has a lot of value and is the whole point of capital markets, and from getting profit from fluctuations in the current price not tied to an inherent value of the company, which is where I think you have the winner and loser, even if the trades involve multiple parties. Clearly this is what is being done in high frequency trading.
I can buy the idea of high frequnecy trading serving as market making even if it is not something I can fully appreciate. But it still seems like these high frequency traders (and others invovled in investing based on fluctations) are mainly skimming money from the market without providing value.
I agree somehow, in academia we often create glitter (we call that "innovation") to make us feel useful for civilisation. In the end everyone just fight for her/his own ass.
But you know, i'm more willing to write application for Earth Sciences (like im doing now) and living a misery than transferring cash & stocks with obscure algorithms..
That might just be stupid, maybe you're correct, that's just a story i tell myself.
I think that's getting a little high minded for the purpose of the OP's question. I think it's fair to interpret the question as "Is there a good faith argument that HFT is beneficial to markets in a way that also benefits everyday citizens? Are there positive downstream effects? Is the intent of HFT strictly selfish?"
I don't think your comparison to academia holds up there.
Yeah, fair enough. The truth is that I'm just a little frustrated by people touting the horn of "making the world a better place" when in reality most end up doing nothing of the sort but then criticize people working in Finance :)
The market is a machine that routes society’s resources into making nearly everything. Making better routing decisions has immense value.
When someone can profit from the same decision everyone else would make by doing it 0.000000012 days more quickly, IMHO he’s exploiting a design flaw in the way the market clears. That’s amplifying noise rather than signal.
ok, that was a bit of my original question (not well asked).
i understand any civilisation needs funding to grow (do we need growth is another core question), and possibly market to do so.
yet any meaningful decision won't be made at the millisecond scale, sure you can train a model to learn short term rules and generate long term profit. but does that profit society as a whole, i doubt it.
Trading facilitates more efficient allocation of resources at both a geographical and temporal scale. HFT market makers facilitate more efficient trading. If anyone tried pitching automated trading to you as some form of altruistic endeavor then obviously that’s bullshit. These people are out here to make a buck. Those milliseconds to nanoseconds moves are just competition between MMs happening in realtime. Is it done for the sake of a better world? No. But it just so happens to benefit society as a byproduct (on average) in the form of tighter spreads and liquidity. It’s up to you to decide if that’s good enough for you.
If we’re going to paint anyone as “real” villains in the world of trading then I’d argue it’s the informed big block traders. ie hedge funds, banks trading exotics with a high barrier of entry, etc. At least MMs are largely market neutral.
They're part of a the market making ecosystem. That market making allows everyone to buy/sell stocks easily at the true price. HFTs make that more efficient by reducing the bid/ask spread. We had market makers before HFTs so it's not an earth shattering innovation. But it is an incremental improvement.
You can go on Robinhood and buy stocks for free. Courtesy of some HFT in return for getting first dibs on your trades. If we compare that to the fees of yesteryear it's brought real value to long-term retail investors.
Unsophisticated investors only using market orders will also pay less spreads than they used to.
Going out on a limb, I think the losers are mutual funds and similar who are less able to monetize their fundamental analysis by buying or sell big chunks of stock without moving the market.
When bitcoin was young there wasn't much in the way of HFT between exchanges, which sucked because if you wanted to transfer coins to someone across the world you would on average lose 7-12% on price differences. Western Union, in comparison, was a flat 10%, making it bitcoin at the time almost pointless.
When there isn't enough volume HFT strategies tend to not run, and so to give an example, my first time trading options was an iron condor on /GC (gold). I bought at a reasonable price, but when I went to sell, where I would have netted a cool 50%, because of low volume and I didn't know to set a limit order, I lost about 50%, so even if my trade was "successful" I lost. If there was a bit more volume HFT could step in and we could have normalized prices where limit orders are not required. On the other end, without HFT, it's easy to play that game and setup orders of opportunity where someone else might mess up and you can make a pretty penny, not that I've personally tried this.
No, but there are many things that don't provide any net value that is even more prolific. All the sugary drinks that just give you health issues, the big monopolistic companies that replaced smaller decent-wage shops with big low-wage machines that suck the value out and doles it out at the top. If everything is designed to take value from one place and never give back, is that beneficial? Of course not. If you only look at the product, you see only half the picture.
Evil is everywhere, really. Our brains are not made to really understand these things well. The easiest thing is to resign yourself to at least make you and your familys life easier. Which is acceptable enough.
> All the sugary drinks that just give you health issues (...)
> Evil is everywhere, really.
i know, i live 10km from Nestlé HQ. and the banks in my country manage a significant part of the cash in this world.
> Our brains are not made to really understand these things well.
Agreed. I was recently reading several text saying that our brains are adapted to small hunter-gatherer communities of 300 ppl max.
> The easiest thing is to resign yourself to at least make you and your familys life easier.
Not now i know how the Earth System react, because a look at the latest IPCC projections doesn't make me want found a family.
> Which is acceptable enough.
Listening to some climatologists, there is a chance i see a world with less than a billion person from my own eyes. My brain cannot accept such a perspective acceptable (without actively fighting it at least).
High margin businesses rarely if ever provide (equitable) benefits to someone other than shareholders, but the innovations they create may/usually trickle down to the rest of us over time, one way or another.
Yes, HFT provides liquidity to capital markets, reducing transaction costs of financing. The social benefits here can be a bit hard to see, but they are certainly real. When HFTs make money, it's because they're buying low and selling high. That means that they are making prices slightly more efficient for the next person to come along, which in turn means that that next person gets a slightly better more accurate price.
Yes, it absolutely does. Rapid efficient capital allocation allows our economy to react nimbly to anything that gets thrown at it (like covid).
The sharp v recovery in the markets was surprising, but not so much when you realize what's backing it. People gave credit to the wrong group. They said it was the fed, it wasn't, it was the HFT. All the fed did was add some zeros to accounts and relax some interest rates. HFT had to figure out where the money goes.
Without HFT, it likely could have taken a year for the market to recover. It would have taken forever to unravel all the changes (some ephemeral, some not) and figure out how to efficiently allocate all that money.
If I was the democrats, I'd find a way to connect the market to main street rather than try to create ftt. I believe the first country that does this will win the 21st century.
Imagine being able to come up with a business idea, partner with some friends, do a bit of proving out and publicizing your team and money just flows into it based purely on the merit of your real potential. No politics, no long lunches and dinners with VC, no irrational idiots. Just pure, unfettered meritocracy.
Or imagine having a long standing mainstreet business that gets hit with a one time, out of its control, disaster. No need to go the bank with hat in hand, the money just shows up in your account, with hyper competitive interest rates. The same could be said if you have an idea for expansion or efficiencies. Just send out a press release with a few specifics, and next day you are underwritten.
SPAC is sort of like that. Sadly, democrats have their own brand of xenophobia. They tax what they don't understand. It's very unfortunate that the GOP didn't vote with the democrats to impeach Trump. Historically, I think it will go down as the most colossal political mistake since Nixon.
One way to think about all this, is DeepMind / starcraft. AI could already out-micro any competitor, but now it's getting to a point where it can out-strategy as well.
Having tools like that to manage our markets is a very powerful tool and makes the US not only hyper efficient but a far more competitive than any other nation.
That said, the whipsaws of computers figuring out things too fast can be tough on people. pure, unfettered meritocracy can be hard for those without merit to offer.
Yang and his UBI isn't a bad idea.
Where it provides less value are traders who intentionally inject volatility. Some guy went to jail over that (flash boys)
When i finished my theoretical Physics PhD, HFT was THE way out of academia for making money in my field. I didn't follow this path as it felt at the time a pretty evil thing to do.
Does HFT provide any benefits for our society?