Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.
Emphasis mine. I interpret Lewis’ claim to be that BATS was helping HFTs extract money from non-HFT investors. The benefit to which I referred is the fee BATS was paid for the faster market picture and the increased trading volume generated as a consequence.
More broadly and aside from allegations of specific wrongdoing, the claim is that HFT is just shaving the margins of everyone who makes trades more slowly. This argument makes sense to me; I can see no added value in giving preferential information to one market participant over others. It isn’t as though HFT is providing a service by helping disseminate information faster—most of the action taken by regulators on the subject was because of exchanges not informing investors about whatever they were doing. My naive guess is their only real impact on the market is to slightly amplify the noise.
That being said, I can easily imagine HFT competing to a profit margin of zero and thereby solving itself, and I can also imagine that there would be other uses for the technology once other types of algorithms were introduced. I can also imagine that the regulatory burden would be greater than the damage they do so it wouldn’t be worth it to ban them.
Which is why IEX was the focus of my interest. They are competing on the basis of countering this specific practice, and they seem to be doing alright.
I’ve asserted a lot of things. Should you believe me? You don’t know that I’m disinterested (though you should damn well know that 300 pages of advertising copy is very, very interested). But I can provide a different perspective; you can’t imagine that anything good is going on, but I can try to widen your imagination.
More broadly and aside from allegations of specific wrongdoing, the claim is that HFT is just shaving the margins of everyone who makes trades more slowly.
The main difference in perspective I want to promote is how you carve up the market. You’re carving it into HFT and Everyone. I say that you should carve it into market makers and investors. HFT makes money. It makes money by shaving the margins off of someone. But why think that it’s shaving “everyone”? It’s competing with market makers and shaving their margins. The market makers are mad about that. That’s enough to explain everything that is observed. Maybe something bad is going on beyond that, but no one says what, no one except liars.
I could say more, but I think it would distract from that one point. (Indeed, I think my prior comments made that mistake.)
From Lewis:
Emphasis mine. I interpret Lewis’ claim to be that BATS was helping HFTs extract money from non-HFT investors. The benefit to which I referred is the fee BATS was paid for the faster market picture and the increased trading volume generated as a consequence.
More broadly and aside from allegations of specific wrongdoing, the claim is that HFT is just shaving the margins of everyone who makes trades more slowly. This argument makes sense to me; I can see no added value in giving preferential information to one market participant over others. It isn’t as though HFT is providing a service by helping disseminate information faster—most of the action taken by regulators on the subject was because of exchanges not informing investors about whatever they were doing. My naive guess is their only real impact on the market is to slightly amplify the noise.
That being said, I can easily imagine HFT competing to a profit margin of zero and thereby solving itself, and I can also imagine that there would be other uses for the technology once other types of algorithms were introduced. I can also imagine that the regulatory burden would be greater than the damage they do so it wouldn’t be worth it to ban them.
Which is why IEX was the focus of my interest. They are competing on the basis of countering this specific practice, and they seem to be doing alright.
I’ve asserted a lot of things. Should you believe me? You don’t know that I’m disinterested (though you should damn well know that 300 pages of advertising copy is very, very interested). But I can provide a different perspective; you can’t imagine that anything good is going on, but I can try to widen your imagination.
The main difference in perspective I want to promote is how you carve up the market. You’re carving it into HFT and Everyone. I say that you should carve it into market makers and investors. HFT makes money. It makes money by shaving the margins off of someone. But why think that it’s shaving “everyone”? It’s competing with market makers and shaving their margins. The market makers are mad about that. That’s enough to explain everything that is observed. Maybe something bad is going on beyond that, but no one says what, no one except liars.
I could say more, but I think it would distract from that one point. (Indeed, I think my prior comments made that mistake.)