Which is why it frankly ought to be stopped. It doesnt add any informational value to the prices of stocks, nor does it raise any capital for investment. What it does is to allow people with expensive computers in very expensive locations to divert a good chunk of the return from other people’s investments into their own pockets by gaming the system. That sort of thing is not good for the economy, the social order or, well, anyone other than the people with a technological spigot hammered into the veins of the stock market.
That’s not why it’s useful. It’s useful because it provides liquidity and reduces the costs of trading.
Absent other people getting their trades completed slightly ahead of you, getting your trades completed in a millisecond instead of a second is that valuable ? I’m not being rhetorical—I know very little about finance. What processes in the rest of the economy are happening fast enough to make millisecond trading worthwhile ?
I would have guessed a failure to solve a co-ordination problem. That is, at one time trades were executed on the timescale of minutes (or maybe even days or weeks once upon a time), and that at every point in time since, there has been a marginal advantage to getting your trades done a little faster than everyone else. At some point the costs of HST outweighed the liquidity benefits but on-one (alone) was in a position to back out without losing—the end result being major engineering projects aimed at shaving milliseconds off network propagation delays, and flash crashes.
I can imaging an alternative universe where, at the point when trade times got down under a second, everyone got together and said “look, this could get silly”, and decided to agree that exchanges should collect trades arriving in 1-second buckets and execute them in a randomly permuted order. (Or does something like that not work for some obvious reason ?)
(Also, I would guess that HST does not divert “a good chunk” of the return from other people’s investments—if it were more than a sliver, I suspect the co-ordination problem would have got solved.)
getting your trades completed in a millisecond instead of a second is that valuable ?
The benefit to the small investor is not really faster execution—it is lower bid-ask spread and lower trading costs in general.
For example there was a recent “natural experiment” in Canada (emphasis mine):
...in a recent natural experiment set off by Canada’s stock market regulators. In April 2012 they limited the activity of high-frequency traders by increasing the fees on market messages sent by all broker-dealers, such as trades, order submissions and cancellations. This affected high-frequency traders the most, since they issue many more messages than other traders.
The effect, as measured by a group of Canadian academics, was swift and startling. The number of messages sent to the Toronto Stock Exchange dropped by 30 percent, and the bid-ask spread rose by 9 percent, an indicator of lower liquidity and higher transaction costs.
But the effects were not evenly distributed among investors. Retail investors, who tend to place more limit orders — i.e., orders to buy or sell stocks at fixed prices — experienced lower intraday returns. Institutional investors, who placed more market orders, buying and selling at whatever the market price happened to be, did better. In other words, the less high-frequency trading, the worse the small investors did.
…In a paper published last year, Terry Hendershott of Berkeley, Jonathan Brogaard of the University of Washington and Ryan Riordan of the University of Ontario Institute of Technology concluded that, “Over all, HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory price errors, both on average and on the highest volatility days.”
You seem to call pretty much all sorts of software which makes some decisions “narrow AI”. I don’t think that’s a useful use of the term.
To use your example, most of HFT is basically a very short-term statistical model coupled with an execution engine. It’s neither magic, nor AI.
Which is why it frankly ought to be stopped. It doesnt add any informational value to the prices of stocks, nor does it raise any capital for investment. What it does is to allow people with expensive computers in very expensive locations to divert a good chunk of the return from other people’s investments into their own pockets by gaming the system. That sort of thing is not good for the economy, the social order or, well, anyone other than the people with a technological spigot hammered into the veins of the stock market.
I disagree.
That’s not why it’s useful. It’s useful because it provides liquidity and reduces the costs of trading.
I don’t think this statement is true.
8-/ Lots of things (like questioning authority) are not good for the social order. I don’t consider that a compelling argument.
Absent other people getting their trades completed slightly ahead of you, getting your trades completed in a millisecond instead of a second is that valuable ? I’m not being rhetorical—I know very little about finance. What processes in the rest of the economy are happening fast enough to make millisecond trading worthwhile ?
I would have guessed a failure to solve a co-ordination problem. That is, at one time trades were executed on the timescale of minutes (or maybe even days or weeks once upon a time), and that at every point in time since, there has been a marginal advantage to getting your trades done a little faster than everyone else. At some point the costs of HST outweighed the liquidity benefits but on-one (alone) was in a position to back out without losing—the end result being major engineering projects aimed at shaving milliseconds off network propagation delays, and flash crashes.
I can imaging an alternative universe where, at the point when trade times got down under a second, everyone got together and said “look, this could get silly”, and decided to agree that exchanges should collect trades arriving in 1-second buckets and execute them in a randomly permuted order. (Or does something like that not work for some obvious reason ?)
(Also, I would guess that HST does not divert “a good chunk” of the return from other people’s investments—if it were more than a sliver, I suspect the co-ordination problem would have got solved.)
The benefit to the small investor is not really faster execution—it is lower bid-ask spread and lower trading costs in general.
For example there was a recent “natural experiment” in Canada (emphasis mine):
(source)
Here are some informed opinions on HFT: here, here, and here. If you want a more sceptical, but still informed opinion, here’s an example.
Thanks, that is interesting.