Ian Fraser:

“Not only is HFT legalized front-running. It is also a socially worthless activity that amplifies market movements, increases market fragility, inflates asset price bubbles, and naturally worsens market crashes. And as we saw with the ‘Flash Crash‘ of May 2010, it can also fuel market mayhem.”


Discuss . . .

Category: Really, really bad calls, Regulation, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “HFT: Fragility, Bubbles & Mayhem”

  1. TennesseeTrader says:

    I’m just amazed that it’s taken this long to have an actual discussion.

  2. stonedwino says:

    Absolutely agree with Ian. Why is it legal? Why is the SEC asleep at the wheel again? The SEC is incapable of policing markets – we know that. Like a traffic cop on valium…

  3. WickedGreen says:

    Hard to find a lot to disagree with in that quote. Of course, HFT can also DEFLATE prices/bubbles, if there’s an electronic ‘flight to safety’.

    One thing I don’t get: we hear all this stuff about how transaction fees will kill returns. Why isn’t this true of front-running outfits? Do hundreds of thousands of orders get successfully cancelled in seconds? Without cost? Seriously? On the other hand, if hundreds of thousands of orders get successfully executed in seconds – pennies notwithstanding – don’t these firms get smacked on transaction fees? Do they get excused from these fees because of their noble provisioning of volume / “liquidity”? What about taxes? How do they avoid cap gains – by engendering offsetting losses? Writing them off as business expenses?

    I look forward to being educated in this regard …

  4. td says:

    Nothing socially worthwhile in lower cost of trading for everyone? Lot of bluster on both sides but thus far I’ve read nothing that quantifies or even really attempts to quantify the real cost/benefit. The way Lewis presented this on 60 Minutes made it sound like everyone was losing something every time their money traded and that isn’t possibly the case and as much as I enjoy his writing he has to know that. In fact the likelihood that a retail investor has their money exposed to this kind of trading is very small and anything taken off the top of those trades in the rare instances they occur seem to me to be heavily balanced by the extraordinary shrinkage in bid/ask. For my own part I wouldn’t’ care if HFT went away tomorrow but if it did it would mean almost nothing to the average retail investor who know has been lead to believe the system is rigged against him.

  5. CD4P says:

    So, why not go for an IPO and flip the shares to the same retirement funds they’re ripping off?

    I’d relate it to grave robbing, but Charles Dickens already covered that in A Tale of Two Cities.

  6. louis says:

    What is painfully obvious here is that the system the ordinary investor thought was in place is again to busy watching porn. The farce continues. LTCM, CDO, CDS, MBS, AAA, HFT.

  7. I’m against predatory trading as much as the next guy, but I’m also probably less comfortable than the next guy making value judgments about it. There are lots of practices on Wall Street with little — or arguably negative — social utility. I also think that a moralistic framework is not the most effective way to build a practical case against this type HFT. (Though it’s certainly the best way to sell books, generate page-views, or provoke comments!)

    I think the best way to fix this whole mess is to sensibly break down the types of HFT that are acceptable and the types that are technically legal but obviously wouldn’t be if we were forced to blow up our regulator system and rewrite everything from scratch. Everybody, including the little guy, wants a fast, deep marketplace. But nobody wants to play with cheaters. Somewhere in there is a balance.

    I’d also add that human behavior and our broken investment psychologies are far worse at exacerbating bubbles, crashes, and general instability. We can’t exactly regulate that, though.

  8. VennData says:

    If I put in a limit order to buy a hundred shares, and I get those hundred shares at the the price I set. What is the problem?

    And if you set a market order, why? Set a limit order.

    Next media dust up?

  9. Joe says:

    Think of HFT as a toll on the road where the toll is charged to the gas stations so that you never see it. Tolls are not a problem if they benefit the user of the road. If the primary or sole beneficiary is the toll taker, end it.

  10. Concerned Neighbour says:

    I agree with most of this statement, but I’m not sure they play a huge part in forming asset bubbles. I would describe their role in this respect as minimal. The real culprits are what I refer to as the “red alert” algorithms, the ones that kick in when the “markets” are at risk of finishing in the red.

  11. constantnormal says:

    The technological and regulatory cures for this are trivial to implement … the SEC could require the exchanges to hold all incoming queries unit a tenth of a second has passed (or pick your delay interval of choice), there should be data in the transmission packet header to facilitate this, as it is used to manage TCP time-outs, or the exchanges could require originating message traffic of all kinds to include a timestamp of the time that the transmission was sent, and the SEC (or FCC) should make it illegal (with ginormous penalties, like removal of connection service) to spoof the time stamps. That would allow the continuation of HFT but level the playing field.

    The cost to implement is trivial compared to the money grab that takes place daily … and this is not anything that the SEC or exchanges are unaware of … for their own reasons, they want to be part of the problem.

  12. constantnormal says:

    Fixing the “flash crash” problem is a horse of another color, as that is due mainly to electronic traders withdrawing liquidity in the absence of market makers who were formerly charged with maintaining orderly markets … we no longer have anyone responsible for maintaining orderly markets …

  13. Flat out uninformed, hysteria driven hyperbole. Shameful really.

    One can argue, if there is any interest in multiple perspective at all — and who knows, perhaps there isn’t — Michael Lewis has used Flash Boys as a tool of special interests behind IEX. Read this:


    Also see these comments from the Tabb group:

    “So where is all of this value going? To high-frequency traders? We don’t see them doing much better than the exchanges or brokers. The pressure to invest in expensive technology and infrastructure, colocation and connections to many more markets, as well as improvements in vendor-based solutions, have caused a hit to their revenues. TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014. Looking at recent public data, the profitability of HFT firms in the US equities market has declined, just as the number of players has decreased.”

    “If the exchanges, brokers and HFTs are not reaping the rewards, then where is this leakage going? This money is going back to investors in the form of better and cheaper executions, as few if any institutional investors we have interviewed – and we have interviewed thousands – have ever expressed that their equity implementation costs have increased, meaning … trading just becomes cheaper and cheaper. That cost comes from somewhere: market makers, speculators, brokers and exchanges.”


    I hope this actually gets posted. My previous attempt to post on HFT was denied, so I’m not holding my breath.


    “Shilling for the Buyside”

    Amazing, imagine the actual buyers of stock dont want to overpay for the transaction.

  14. Michael G says:

    You still lose out with a limit order. Because HFT widens the spread, some of your limit orders should have reached your target price, but will never do so and will never be fulfilled. With a buy limit, you never get the benefit of owning the stock. With a sell order, at best there will be a delay and by the time the order goes through, the stock you wanted to buy in its place will be too expensive.

  15. postpartisandepression says:

    Since this is how the “markets” make their money now – by giving closer and closer access the the guys who are running these HFT the SEC (read politicians) have no interest in regulating this. Our oligarchy is pretty well in control now and the is only getting stronger. Notice it took a Canadian to do something about this. Here it is just another cost of doing business.

  16. darkstar says:

    On CNBC the other day, I heard one of the touts say something to the effect that HFT “Unquestionably provides liquidity.”

    Really? Aren’t almost all the “orders” just sent out to probe the markets, and cancelled instantaneously? So isn’t the liquidity actually fake liquidity? Giving us a false sense of assurance about the health of the markets?

    I’ve heard that 70% of the volume these days is HFT. If that’s the case, doesn’t that mean the true volume is historically very low? That when we really need liquidity, there is none? Isn’t that what caused the flash crash?

    Enquiring minds want to know…

  17. Paul says:

    As an algo writer, I often see certain wording suggest that HFT and aglos are one-and-the-same. Others are clear to differentiate HFT and algorithmic trading. My algorithms would not noticeably suffer from a 0.1s to several second delay. In fact, my data is often up to 30 seconds lagged. My “fairness” detector doesn’t flinch at fact that proximity to an exchange increases profits. Why else would one live in the city as opposed to commute from the suburbs?

    I see little moral difference between an HFT trader and a human trader. Both are skimming the anticipated move. In one corner, we have highly trained instinct, and in the other, we have highly trained computer models. Rather than having fat finger trades, we’re starting to see untrained/unconstrained algo trades. At some point, it becomes possible to counter the algorithms once their fingerprint becomes statistically obvious.

    Ever see an in-play ticker move throughout the day and there’s this smaller time-frame noise that bounces 5-10c around the trend? Algorithmic scalping. Then suddenly there’s a huge spike/drop? Manually set, automatically executed orders. Benefit to the market? Arguable. Benefit to investors? Minimal. Benefit to middlemen? Job security. In truth, HFT is creating jobs, and enhancing volatility. Traders live and die by volatility. Volatility enhances social well-being? Quite the opposite.