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By: SAADEH Fri, 10 Aug 2012 09:21:31 +0000 I agree with another post futher up the thread,HFT’s do not always hold on to postions for just seconds scalping the market ,it can be minutes ,it all depends on the trading system they are using.Some traders open between 15-20 position at a time and can remain open for hours if the market volumes are low. Nidal Saadeh UK

By: spectre855 Thu, 09 Aug 2012 15:33:48 +0000 @najdorf, isn’t the exchange the stock trades on playing the part of the salesman in your example? If I buy a stock, I’m not calling up an HFT shop to buy it, I’m posting a transaction on an exchange the same way that the seller is and it’s the exchange that pairs us.

As far as my understanding goes, your example would be more accurate if you had alluded to showing up at a dealership looking for a Toyota and some other guy was following you around, waited until you settled on a car, and then jumped in front of you to buy it. He then turned around and sold you the car for a slight markup. The same with the Ebay example. Ebay’s part is played by the exchange. The HFT is the sniper who buys the product right at the buzzer and then turns around and offers to sell it to you for one extra penny.

Maybe it’s just my lack of financial sophistication but I still don’t understand how that is helpful.

By: m_m Wed, 08 Aug 2012 12:39:58 +0000 Why do people have the impression that HFTs hold onto all positions for a second? It is usually many minutes, often hours. That they _can_ hold a position for a few seconds is not the same as _do_.

By: stereoscope Wed, 08 Aug 2012 04:48:58 +0000 What do you mean, why should I pay even pennies to an HFT?

They are not providing shares to buy. They don’t hold anything. If I can buy it from them, then I could have bought it from someone else, the same person they did, within seconds of when I got them.

Why should I pay a guy even pennis for holding onto a stock for a second? The brokerage fees may have been higher in the 70s, but at least those companies charging fees actually were making markets in the shares. They held shares and took risks in holding them. HFTs only hold them for mere moments.

By: najdorf Wed, 08 Aug 2012 04:21:47 +0000 It seems like the anti-HFT crowd imagines a market with no middleman, where buyers and sellers can meet at the midpoint of their price range and there is no cut for a 3rd party intermediary.

Looking at markets other than stocks, does this seem realistic? Real estate professionals take huge cuts out of real estate transaction volume, even when they do very little work. Everyone is mad when they have to pay the fee, but no better system has been invented. Ebay takes a huge cut on auctions, even though they are just a listing service where the user has to do all the work. People complain, but no one has created an effective and free or cheaper competitor. Car salesman make a nice living for providing the service of “Oh, you would like to buy a Prius? Well, fortunately we are a Toyota dealership so we can get you one in a month, as long as you like yellow. Pay me!” Diamond rings have a huge retail mark-up built in, but a large fraction of grooms pay this mark-up rather than finding the owner of an existing diamond who wants to sell. I could go on.

In this framework, HFT looks pretty good. If you want to buy 100 shares of IBM and it’s trading around 190 all week, you can go into the market and pick your limit price in the 190 neighborhood and get your shares quickly, paying an implicit price of a pennies per share to your intermediary. You’re not paying 6%, as you do in many other markets and as stock traders used to (look up what brokerage fees were in the 70s). It’s not like Knight Capital and its peers were making gangbusters profits before its misstep – the remaining market-making-type firms are survivors in an industry where many older firms have gone out of business due to profits drying up due to more efficient markets.

By: MrRFox Wed, 08 Aug 2012 04:12:23 +0000 @TFF, @ Curmudg – about the first and second posts in this thread –

Really, TFF? Curmudg – IMO it’s not quite fair to compare this piece to that Amtrak burger-fetish bit, which actually had something (thin) to it. Seems more appropriate to put it in a class with, and second-only to, that (thankfully passing) infatuation someone had about finding a ‘free lunch’ through creative Target2 default accounting. (Ugh!)

By: THamacher Tue, 07 Aug 2012 20:43:11 +0000 We used to pay specialists a lot of money to damp down this volatility — and I’m not sure that critics of HFT are accurately considering the cost of that system. It doesn’t help that the flaws of the current electronic system are much, much more visible.

Maybe someone will attempt a more systemic cost comparison soon. . .

Great piece.

By: MercuryZH Tue, 07 Aug 2012 19:18:02 +0000 Two wrongs and a right:

“But those investors always get filled at NBBO — the best possible price in the market — and they do so immediately.”

Wrong, B/Ds have significant leeway to fill outside the NBBO and the whole point of many HFT algos is to manipulate the NBBO anyway.

“We’re seeing the same thing with the fiasco at Knight Capital, where a highly-sophisticated high-frequency stock-trading shop lost an enormous amount of money in a very small amount of time, and small investors lost absolutely nothing.”

You’re not happy if your IRA had a stop-loss on in one of the names NITE temporarily cratered.

But yes, the LIBOR “scandal” is a joke. It more or less exactly tracks Fed funds anyway – the favorite tool of centrally planned ZIRP which will royally screw millions and millions of people in the end.

By: beowu1f Tue, 07 Aug 2012 19:04:51 +0000 The Fed governors can levy a transaction fee on anything connected to the banking system (which is to say, everything).
They could levy a financial transaction fee or simply announce a fee that’d only apply to exchanges that don’t institute their own HFT fee. Easy-peasy, a majority of the Fed governors can vote to update their fee schedule a bit faster than Congress can vote to amend the Internal Revenue Code (increasing what Fed rebates to Tsy in the process).
Of course taken to its logical extreme, the Fed could more or less replace the IRS as Tsy’s revenue collector (UW-Madison Econ professor Edgar Feige proposed as much with his Automated Payment Transaction tax).