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Group Subscription. If you know that a game is rigged AND that it is LEGAL to participate in this rigged game, would you do everything possible to participate if you could? Of course you would. The battle to capture all of this guaranteed money has been going on for several years. And what has happened is very Darwinian. The smarter players have risen to the top. They are capturing much of the loot.
Searching for High-Frequency Trading Opportunities - Kindle edition by Irene Aldridge. Download it once and read it on your Kindle device, PC, phones or. Searching for High-Frequency Trading Opportunities (Wiley Global Finance Executive Select Book ) - Kindle edition by Irene Aldridge. Download it once and.
It truly is an arms race. More speed gives you more slots at the front of the lines. So more money is being spent on speed. Money is also being spent on algorithms. You need the best and brightest in order to write algorithms that make you money. You also need to know how to influence markets in order to give your algorithms the best chance to succeed.
There is a problem in the markets known as quote stuffing. This is where HFT create quotes that are supposed to trick other algorithms, traders, investors into believing their is a true order available to be hit. In reality those are not real orders.
They are decoys. Rather than letting anyone hit the order, because they are faster than everyone else, they can see your intent to hit the order or your reaction either directly or algorithmically to the quote and take action. And not only that, it creates such a huge volume of information flow that it makes it more expensive for everyone else to process that information, which in turn slows them down and puts them further at a disadvantage. There was never an intent to execute a trade.
It is there merely to deceive. Everyone in the HFT business wants to get to the front of the line.
They want that guaranteed money. In order to get there, HFT not only uses speed but they also use algorithms and other tools feel free to provide more info here, HFT folks to try to influence other algorithms. It takes a certain amount of arrogance to be good at HFT. If you think you can out-think other HFT firms you are going to try to trick them into taking actions that cause their algorithms to not trade or to make bad trades. Will they take risks knowing that if they fail they may lose their money but the results could also have systemic implications?
We saw what happened with the Flash Crash. Is there any way we can prevent the same thing from happening again? Is it possible that something far worse could happen? I have no idea. And neither does anyone else. It is this lack of ability to quantify risks that creates a huge cost for all of us.
Warren Buffet called derivatives weapons of mass destruction because he had and has no idea what the potential negative effect of a bad actor could be. The same problem applies to HFT. How do we pay for that risk? And when? When you have HFT algorithms fighting to get to the front of the line to get that guaranteed money, who knows to what extent they will take risks and what the effect will be not only on our U.
What about the HFT players outside U. All markets are correlated at some level. Problems outside the U. So why are some of the big banks and funds not screaming bloody murder?
To use a blackjack analogy, it's because they know how to count cards. They have the resources to figure out how to match the fastest HFT firms in their trading speeds. They can afford to buy the speed or they can partner with those that can.
They also have the brainpower to figure out generically how the algorithms work and where they are scalping their profits. By knowing this they can avoid it. And because they have the brainpower to figure this out, they can actually use HFT to their advantage from time to time. Where they can see HFT at work, they can feed them trades, which provide some real liquidity as opposed to volume.
Of course not. We should be able to make our decisions as investors to work with those that give us the best support in making investments. Not those who have the best solution to outsmarting HFT. It's not their core competency. It is a problem for them, but they also know that by being able to deal with it better than their peers it gives them a selling advantage.
I know why there is HFT.
It adds no value. I know this sounds stupid on its face. Reverse-engineer a collapse? But that may be a better solution than expecting the SEC to figure out how to regulate and preempt a market crash. I wrote this in about two hours. Not because I thought it would be definitive or correct.
But there is so little knowledge and understanding of what is going on with HFT that I believed that someone needed to start the conversation. Search icon A magnifying glass. It indicates, "Click to perform a search". Close icon Two crossed lines that form an 'X'.