HFT Myths

promagma said:
+1 .... this is what the "I'll start making money when they ban the HFT's and stop losing a penny on every trade!" crowd needs to understand. If you are a small retail trader using market orders, HFT RARELY affects you -
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I've actually been requested to make wider, "more hittable" quotes on some exchanges (think FX with last-look). Retail traders complained to the exchange that they could never hit my quotes. So I widened out my quotes to accommodate the change. Can you guess what happened next? The retail traders' (they weren't really retail traders, but bank trading desks) hit rates went sky-high, nearly 100%, but my PNL went up too due to the wider spreads (think back to 1/8 dollar spreads on equities). After a few days, decent money lost by them/made by me, and a bunch of wasted time on all 3 sides (retail, exchange, me), the banks kindly requested I go back to "normal" quoting.

Note: A few of the retail traders were happy with the change and continued using my slow/wide feed for months afterwards. After they got fed up with the wider spreads they were paying on my non-HFT feed they went back to my normal feed. The non-HFT feed was simply one where I couldn't last-look them and my quotes had a minimum time duration requirement. Be careful what you wish for anti-HFT people, I'm happy to let you get your way; it would drive my costs down immensely and cost you money. The real losers would be exchanges and clearing firms.
 
hft said:
I've actually been requested to make wider, "more hittable" quotes on some exchanges (think FX with last-look). Retail traders complained to the exchange that they could never hit my quotes. So I widened out my quotes to accommodate the change.
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I've got a question.

Which color prison jumpsuit do you prefer? Bright orange or striped? :D
 
I won't clutter up the thread with a dozen different quotes, but lots of good stuff there from jb, onelot, bag, hft...thank you for that (and the pricing info onelot). It's hard for me to vilify people for playing by the rules and liquidity providers should certainly get paid for their service. That said, the complexity in the current system reminds me a lot of the IRS tax code. hft's forex example aside, many of the above points seem to suggest that the executable price/size available to price takers would be roughly equivalent if all MMs were competing on a single venue rather than fifty. Then why go through all the over-quoting, cancellations, THOR-like counter measures, etc.? Talking my book a bit here, but it feels like the balance of information has swung a bit too far in favor of liquidity providers vs. takers. As a price taker, I have no idea where the market really is at any given time...or even the logic my broker uses to route orders. Like I said, I'm happy to pay for liquidity but I'd at least like to be able to make semi-informed decisions. hft- I don't know the fx market, but I don't think the improved economics you cite as an MM would last long in the equities space; fat margins will attract competitors quickly.

Anyhow, I suppose I'd be content as long as I knew that my own orders weren't being used against me. I do trade order sizes of up to 1.5% of ADV in illiquid names and through the course of this discussion (and my slippage numbers) am beginning to realize that I'm probably being foolish with them. I send LMT orders priced 5% through the bid/offer in order to get done and hope that IB's smart router will do something...smart. Who knows, maybe it does and my slippage is as good as it's going to get. While I'm on it, if anyone knows of any solid SORs that would be suitable, I'd appreciate a recommendation; I can get access to most (I think) but don't have a real good way of evaluating them without migrating the entire operation and doing trial and error.
 
jtrader33 said:
the complexity in the current system reminds me a lot of the IRS tax code. hft's forex example aside, many of the above points seem to suggest that the executable price/size available to price takers would be roughly equivalent if all MMs were competing on a single venue rather than fifty.
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Fully agree, about both the taxes and equity market fragmentation. Bid/ask spreads would actually probably get smaller since MM'ers would have way less overhead, both in hard costs and manpower. Centralization would be great if it happened naturally, like how *most* futures trading is primarily at a single venue. There are some notable exceptions, but price discovery is pretty transparent in most of the major asset classes. There's no feasible way to force this type of consolidation though without going all Communist on the entire equities space in the country.
 
hft said:
Centralization would be great if it happened naturally, like how *most* futures trading is primarily at a single venue. There are some notable exceptions, but price discovery is pretty transparent in most of the major asset classes. There's no feasible way to force this type of consolidation though without going all Communist on the entire equities space in the country.
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on another thread, I have suggested a way to go to a single order book for each instrument without communism, but a regulated market based system that still ensures competition among exchanges:

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Anyway, this would be my "grand plan" for the markets:

- ban internalization
- a single exchange with one order book for each instrument. anyone who wants to transact in this instrument has to route their order into that book
- simple limit orders only. no market orders, hidden, iceberg, ALO etc. no games.
- order priority on price, then time. no exceptions.
- orders will be held for at least 2 seconds before a cancellation is possible

- SEC maintains a list of approved exchanges. This means that they vet possible trading venues and set and enforce minimum technology and financial standards etc.
- Each of those approved exchanges will be able to bid for the privilege to be that single order book for a trading instrument for a period of 2 years. After that there's a new tender.
- Exchange bidding is based on a single number: The price per executed share traded. Exchanges will have to provide all ancillary services like quote acceptance, cancellations and real time quote dissamination for free. This will make the competitive bidding among exchanges very transparent and the offers easily comparable. Of course the lowest offer is chosen for those 2 years.
- The 2 year terms of all stocks will not expire at the same time but evenly spaced out based on alphabet.

With this system we will have a stable, simple and cheap market with a single order book yet without long term exchange monopolies.
 
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