# High frequency trading - basic questions **URL:** \ **Category:** Factual Questions\ **Created:** [April 1, 2014, 10:05pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121 "2014-04-01T22:05:35Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 2, 2014, 4:04pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/21 "2014-04-02T16:04:55Z")
> [@ThisUsernameIsForbidden](#): > > Granted, an order has market effect proportional to the size. But we are talking about a middle man that has no function other than to create a wider margin so he can insert himself into it. He doesn’t facilitate anything. A broker has a function, an exchange has a function, but these situations we are talking about exist because some middle man is quicker and has access to information that he shouldn’t have (ethically). This gets into some pretty theoretical and specific economic theory minutia. It’s not that hard to make a case that a large, market moving order provides new information in regards to supply and demand for a security and that other market participants acting on that information are moving the market to it’s true price - which is an efficient market. ---
**Author:** ![Quercus](https://avatars.discourse-cdn.com/v4/letter/q/7ab992/32.png) [@Quercus](https://boards.straightdope.com/u/Quercus)\ **Post date:** [April 2, 2014, 4:45pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/22 "2014-04-02T16:45:59Z")
> [@Trom](#): > > This gets into some pretty theoretical and specific economic theory minutia. It’s not that hard to make a case that a large, market moving order provides new information in regards to supply and demand for a security and that other market participants acting on that information are moving the market to it’s true price - which is an efficient market. No, because if you say the market price is correctly 40.05, the actual (not middleman) seller is not getting the actual market price – they sold at 40.00 when the market price was in fact 40.05. So signals are not in fact being transmitted correctly and therefore by definition the market is not efficient. I suppose you could argue that who cares who wins and loses as long as the final price is market-clearing, but if you do that, then you’re basically arguing for insider trading as creating efficient markets. Which I think at most, we could grant is technically true on a micro level, but is overall bad for markets and bad for society. ---
**Author:** ![ThisUsernameIsForbidden](https://avatars.discourse-cdn.com/v4/letter/t/b4bc9f/32.png) [@ThisUsernameIsForbidden](https://boards.straightdope.com/u/ThisUsernameIsForbidden)\ **Post date:** [April 2, 2014, 6:01pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/23 "2014-04-02T18:01:49Z")
> [@](#): > > other market participants acting on that information are moving the market to it’s true price - which is an efficient market Since not all participants have access to the information they cannot act on it and make the market more efficient. Therefore, the market doesn’t more towards a “true price” (using that logic). In other words, if the buyer knew an HFT shark was going to game him out of millions of dollars, he would use another method of purchasing the shares (at least one has been developed by sending the order to the “furthest” exchange first). That would be even more efficient by eliminating the useless middle man altogether. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 2, 2014, 6:15pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/24 "2014-04-02T18:15:43Z")
> [@ThisUsernameIsForbidden](#): > > Since not all participants have access to the information they cannot act on it and make the market more efficient. Therefore, the market doesn’t more towards a “true price” (using that logic). In other words, if the buyer knew an HFT shark was going to game him out of millions of dollars, he would use another method of purchasing the shares (at least one has been developed by sending the order to the “furthest” exchange first). That would be even more efficient by eliminating the useless middle man altogether. All participants have \*never \*had access to all information or the ability to act on it. The stock market is a more level playing field now than it ever has been before. I’ll take HFT penny spreads and maybe losing a fraction of a cent to some nerds to losing .50c+ to Vinny and the old boys network that was the NYSE specialist system any day. ---
**Author:** ![ThisUsernameIsForbidden](https://avatars.discourse-cdn.com/v4/letter/t/b4bc9f/32.png) [@ThisUsernameIsForbidden](https://boards.straightdope.com/u/ThisUsernameIsForbidden)\ **Post date:** [April 2, 2014, 6:19pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/25 "2014-04-02T18:19:25Z")
Well, you might not mind losing cents on the dollar, but someone spending billions on a regular basis will. That’s why I said big investors will quash this. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 2, 2014, 6:35pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/26 "2014-04-02T18:35:50Z")
> [@ThisUsernameIsForbidden](#): > > Well, you might not mind losing cents on the dollar, but someone spending billions on a regular basis will. That’s why I said big investors will quash this. Goldman Sachs and the other big brokers would love if HFT market makers went away. They’d have the free money monopoly back that they had for decades. _The old system was much worse!_ The focus should be on fixing the market structure flaws that allow certain unscrupulous people/firms to exploit loopholes. My concern is the recent Michael Lewis, 60 Minutes, etc. stuff will get the public and politicians so fired up about something they don’t understand that we’ll end up prescribing a treatment that’s worse than the disease. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 3, 2014, 12:10am UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/27 "2014-04-03T00:10:41Z")
> [@Quercus](#): > > No, because if you say the market price is correctly 40.05, the actual (not middleman) seller is not getting the actual market price – they sold at 40.00 when the market price was in fact 40.05. > So signals are not in fact being transmitted correctly and therefore by definition the market is not efficient. > … I don’t think you can just remove the limit orders that are resting between 40.00 and the “real” price without changing the whole scenario. The fact that there are sufficient limit orders that will trade against the large order are what \*makes \*40.05 the market clearing price. The “real” price isn’t known ahead to anybody and is only know after the order interacts with the market. Obviously the 40.00 seller would pull his order and put it at 40.05 or higher if he knew about a large buy order. If you continue to extend this intellectual exercise and allowed everyone that executed against the buy order at less than 40.05 to reprice their limits higher, the buyer would execute significantly higher and at a worse price. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [April 3, 2014, 2:38pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/28 "2014-04-03T14:38:23Z")
> [@Quercus](#): > > No, because if you say the market price is correctly 40.05, the actual (not middleman) seller is not getting the actual market price – they sold at 40.00 when the market price was in fact 40.05. > So signals are not in fact being transmitted correctly and therefore by definition the market is not efficient. > > I suppose you could argue that who cares who wins and loses as long as the final price is market-clearing, but if you do that, then you’re basically arguing for insider trading as creating efficient markets. Which I think at most, we could grant is technically true on a micro level, but is overall bad for markets and bad for society. The market price before the order was 40.00 and after the order it was 40.05. In order for HFT to work the order must be big enough to move the price. By moving the prices to 40.05 more quickly the HFT guys help achieve an efficient market more quickly. Before HFT the spread between bid and ask orders was around 12 cents, now it is closer to 1 cent. That is the market being made more efficient. ---
**Author:** ![ThisUsernameIsForbidden](https://avatars.discourse-cdn.com/v4/letter/t/b4bc9f/32.png) [@ThisUsernameIsForbidden](https://boards.straightdope.com/u/ThisUsernameIsForbidden)\ **Post date:** [April 3, 2014, 3:43pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/29 "2014-04-03T15:43:09Z")
> [@](#): > > By moving the prices to 40.05 more quickly the HFT guys help achieve an efficient market more quickly. That’s not what is happening here. They aren’t “moving” the prices to 40.05 more quickly, they are buying up all of the shares that someone else wants to buy ahead of them so they can jack the price up. And by “more quickly” we are talking about fractions of a second here. I suggest listening to the interview. People in the thread are equivocating between advances in technology for exchanges improving the system and the ability to game that system, as if we can’t have one without the other. That is an assumption that no one in the thread has provided a basis for. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 3, 2014, 7:05pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/30 "2014-04-03T19:05:53Z")
> [@ThisUsernameIsForbidden](#): > > That’s not what is happening here. They aren’t “moving” the prices to 40.05 more quickly, they are buying up all of the shares that someone else wants to buy ahead of them so they can jack the price up. And by “more quickly” we are talking about fractions of a second here. I suggest listening to the interview. > > People in the thread are equivocating between advances in technology for exchanges improving the system and the ability to game that system, as if we can’t have one without the other. That is an assumption that no one in the thread has provided a basis for. When large buyers or sellers show their hands, markets move against them. This isn’t some new thing. It happened a thousand years ago. The only thing that has changed is the speed at which information is digested and acted upon. Whether or not the practice actually improves efficiency of the market, I don’t know. However, I understand if you don’t think it passes the ethical smell test. Here is a link to a WSJ article written by a large, institutional, long-term investor. They don’t think much of Lewis’ new book. It’s worth a read. [High-Frequency Hyperbole](http://online.wsj.com/news/articles/SB10001424052702303978304579475102237652362). (If you can’t access full WSJ articles, just search for the article title on Google and click through there.) ---
**Author:** ![ThisUsernameIsForbidden](https://avatars.discourse-cdn.com/v4/letter/t/b4bc9f/32.png) [@ThisUsernameIsForbidden](https://boards.straightdope.com/u/ThisUsernameIsForbidden)\ **Post date:** [April 3, 2014, 8:33pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/31 "2014-04-03T20:33:10Z")
I read the article. It is a response to Lewis’ book. The article claims that cries of foul play with HFT are mere “hyperbole”. I take it they have issue with the term “rigged”. Ok, whatever. But I find a lot of “We aren’t sure” in the text that makes it difficult for me to critique the article, because I can’t figure out what it is other than this basic claim: > [@](#): > > Well, sorry, but prices responding quickly—and traders not being able to buy or sell a ton without the market moving—is what is supposed to happen in a well-functioning market. But this is a gloss over how the trading process actually works, so the article must be intended for people that are small investors that don’t understand it. It’s a strawman because what’s at issue isn’t the quickness of the price changes or about being able to buy at one price. At any point in time for a particular stock, there are number of asks and bids. I’m interested in buying stock and let’s say there is a broker out there who can cover it, bam, I’ve just bought it. But what happens when Warren Buffet, for example, wants to buy 1 Billion dollars worth of stock (on the exchange)? He can’t buy it at one price unless there enough shares being sold at that price, when all of the shares are bought up at the lower price, it goes to the askers with the next higher price, and so on. That’s how the market “moves” and all of this is done with the assistance of the fancy computers at the exchange. It’s not slow, and that’s not the problem. That scenario is fine and dandy with the large investor, but not when a trader that has no useful function inserts himself into the process. He sees the order for 1B worth of stock at one exchange, goes to the other exchanges before the order gets there, buys all of it, raises the price, and resells it on the exchange. The authors don’t talk about this in the article, which is not a surprise. There is no increase in efficiency here. In both cases we are talking about trades that happen in fractions of a second. ---
**Author:** ![Doug\_Bowe](https://avatars.discourse-cdn.com/v4/letter/d/df788c/32.png) [@Doug\_Bowe](https://boards.straightdope.com/u/Doug_Bowe)\ **Post date:** [April 3, 2014, 9:10pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/32 "2014-04-03T21:10:57Z")
Michael Lewis was interviewed by Terry Gross for a good 38 minutes on April 2 about his book and how high speed trading works. [http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=297686724&m=297844034&live=1](http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=297686724&m=297844034&live=1) ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 3, 2014, 9:40pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/33 "2014-04-03T21:40:25Z")
> [@ThisUsernameIsForbidden](#): > > I read the article. It is a response to Lewis’ book. The article claims that cries of foul play with HFT are mere “hyperbole”. I take it they have issue with the term “rigged”. Ok, whatever. But I find a lot of “We aren’t sure” in the text that makes it difficult for me to critique the article, because I can’t figure out what it is other than this basic claim: > > But this is a gloss over how the trading process actually works, so the article must be intended for people that are small investors that don’t understand it. It’s a strawman because what’s at issue isn’t the quickness of the price changes or about being able to buy at one price. > > At any point in time for a particular stock, there are number of asks and bids. I’m interested in buying stock and let’s say there is a broker out there who can cover it, bam, I’ve just bought it. But what happens when Warren Buffet, for example, wants to buy 1 Billion dollars worth of stock (on the exchange)? He can’t buy it at one price unless there enough shares being sold at that price, when all of the shares are bought up at the lower price, it goes to the askers with the next higher price, and so on. That’s how the market “moves” and all of this is done with the assistance of the fancy computers at the exchange. It’s not slow, and that’s not the problem. > > That scenario is fine and dandy with the large investor, but not when a trader that has no useful function inserts himself into the process. He sees the order for 1B worth of stock at one exchange, goes to the other exchanges before the order gets there, buys all of it, raises the price, and resells it on the exchange. The authors don’t talk about this in the article, which is not a surprise. > > There is no increase in efficiency here. In both cases we are talking about trades that happen in fractions of a second. The author of the article isn’t from a HFT firm. He’s a multi-billion dollar, long term asset manager. He cares about execution costs for his trading desk and disagrees with Lewis on the negative effects of HFT. Why are you surprised he doesn’t discuss your example? Do you think he has some pro-HFT bias? Last year the CIO of long-term indexing mutual fund giant Vanguard came out in defense of HFT, also, arguing it saved them on execution costs. Again, I agree there are specific practices that are shady. However, overall, high speed trading is not the boogeyman Lewis makes it out to be. Michael Lewis is trying to sell a book. ---
**Author:** ![Terr](https://avatars.discourse-cdn.com/v4/letter/t/839c29/32.png) [@Terr](https://boards.straightdope.com/u/Terr)\ **Post date:** [April 4, 2014, 2:23am UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/34 "2014-04-04T02:23:24Z")
> [@ThisUsernameIsForbidden](#): > > Tempest in teapot, eh. Let’s see. > > (Caution, hypothetical): I run a mutual fund and am buying 10 Billion worth of Microsoft. I think it’s the right time to buy at 40.00$. Since my fund consists of 10$ MSFT, I’m buying 1B of MSFT (25 Million shares). I send the order to buy. It goes to the first exchange, which can get me 1 Million shares. Ok, so I have 960 M left. But at the first exchange, the HFT shark sees that I have an order to buy 25 Million shares. He then buys up the shares at 40.00 at the other exchanges before my order gets there and the price is now 40.05. So he makes 1.2 Million dollars from what? In virtue of sitting closer to the computer? I’m betting that the big investors will eliminate this one way or another, and that they don’t think it’s just a tempest in a teapot. If you’re stupid enough to place market orders (instead of limit orders), you don’t deserve to run a mutual fund in the first place. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [April 4, 2014, 4:35am UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/35 "2014-04-04T04:35:53Z")
Last time this topic came up, I tried to make two points: (A) Liquidity is like lubricant. But like lubricant, enough is enough. You don’t need to pour an entire gallon of oil into one troublesome joint. Yet HFT now represents a huge portion of total stock trading. (B) The market is a “fixed-sum game.” (Or, _once you factor out actual trends_, call it a **zero-sum game**.) HFT players normally sell exactly as many shares as they buy – and just a millisecond later. Thus they have no effect(_) on actual supply or demand, or trends. (_ – Except to the extent that algorithmic feints or ruses can induce orders from non-balanced traders.) Key questions about HFT (and high-volume algorithmic trading in general) include: (1) Does it serve a public purpose? (2) If not, should the public tolerate it? (3) Does it create systemic risks? **HFT serves no public purpose.** “Price discovery” arises from informed supply and demand. HFT traders bring no new information. Perhaps (though I doubt even this) one can argue that a “correct” price is discovered a millisecond earlier than it would otherwise be discovered, but this would have value only if it makes the markets more efficient, i.e yields smaller _effective_ spreads. Does it? Answer: No. This can be deduced empirically, and from the fact that the market is fixed-sum. HFT traders spend huge sums on salaries and infrastructure. (Didn’t one build a dedicated fiber from Chicago to New York for 50 megadollars or such?) and still make billionS of annual profit. Where do these sums come from? Is it their reward for improving market efficiency? No, that would be impossible if the closing prices at the end of the day are invariant. In a fixed-sum game, someone’s gain must be someone else’s loss. And indeed, a large institutional manager claimed to have lost huge sums to HFT. **Should the public tolerate expensive activity with no public purpose?** This may be a philosophical question. I have no objection to professional poker players, and find no fault in stock traders who “game” the system if they do it legally. But it is a dogma of capitalism that entrepreneurs are rewarded for innovations that improve quality of life. Yet HFT profits have no public benefit; to the contrary, they mean each non-HFT trader is paying a penny more when he buys, and receiving a penny less when he sells. Even if the spread appears to be small, HFT sopping of orders can make the effective spread bigger than the apparent spread. The billions of dollars of HFT profits doesn’t grow on trees, and it doesn’t reflect new value added to the economy. Despite this one could still tolerate HFT if it was relatively harmless. The victims are mainly day traders, and other algorithmic traders. Buy-and-hold investors (and customers of low-turnover funds) suffer only very slightly. But I worry that **there is a risk of disaster**. What if an algorithm develops a bug and buys without selling or vice versa? Doesn’t the huge volume passing through computers pose dangers? What if a firm whose algorithm fails becomes insolvent? One thing we know – if there is a major problem, it will be Joe Taxpayer who is asked to help out in the aftermath. The Wall Street Journal article cited upthread seems to agree with me on this point: > [@](#): > > But these concerns are occupying too much attention. The biggest concern we have with modern markets is their complexity and the associated operational risks. The market structure that enables the HFTs and provides us with their benefits may also be one that risks technological calamity. There is an unrelated question which might merit its own interesting thread. > [@Terr](#): > > If you’re stupid enough to place market orders (instead of limit orders), you don’t deserve to run a mutual fund in the first place. I’ve only tiny experience as a private investor, and none as an institutional trader, but I wonder about this. What portion of non-HFT trades are market orders? I assume large traders spoon-feed a series of limit trades, right? I’m not at all sure market orders are wrong for small investors. (For example, I once got bit with two days of commission for a very small limit order, because I forgot to place an All-or-None restriction. Admittedly that would be trivial with today’s tiny commissions.) ---
**Author:** ![Terr](https://avatars.discourse-cdn.com/v4/letter/t/839c29/32.png) [@Terr](https://boards.straightdope.com/u/Terr)\ **Post date:** [April 4, 2014, 4:52am UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/36 "2014-04-04T04:52:00Z")
> [@septimus](#): > > I’ve only tiny experience as a private investor, and none as an institutional trader, but I wonder about this. What portion of non-HFT trades are market orders? I assume large traders spoon-feed a series of limit trades, right? > > I’m not at all sure market orders are wrong for small investors. (For example, I once got bit with two days of commission for a very small limit order, because I forgot to place an All-or-None restriction. Admittedly that would be trivial with today’s tiny commissions.) Note that what I said relates to running a mutual fund. Mutual funds do not buy 100 shares (well, not unless it is BRK.A shares). For a retail investor who wants to get in on a small position in a liquid stock and who doesn’t want to or doesn’t feel like he can exactly time his entrance, market orders are ok - they just basically get lost in the wash. If a big player is stupid enough to place a big market order, he deserves to be and definitely will be fleeced. Severely. ---
**Author:** ![ThisUsernameIsForbidden](https://avatars.discourse-cdn.com/v4/letter/t/b4bc9f/32.png) [@ThisUsernameIsForbidden](https://boards.straightdope.com/u/ThisUsernameIsForbidden)\ **Post date:** [April 4, 2014, 5:03am UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/37 "2014-04-04T05:03:35Z")
> [@](#): > > I’ve only tiny experience as a private investor, and none as an institutional trader, but I wonder about this. What portion of non-HFT trades are market orders? I assume large traders spoon-feed a series of limit trades, right? It’s about timing. They go for block trades first (off the grid, so to speak). But this is not always an option. A limit order can be like watching a ball bounce on the floor, but if the ball doesn’t come back down then they are stuck with whatever equities they are trying to get rid of. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 4, 2014, 2:17pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/38 "2014-04-04T14:17:38Z")
> [@septimus](#): > > Last time this topic came up, I tried to make two points: > > (A) Liquidity is like lubricant. But like lubricant, enough is enough. You don’t need to pour an entire gallon of oil into one troublesome joint. Yet HFT now represents a huge portion of total stock trading. > > (B) The market is a “fixed-sum game.” (Or, _once you factor out actual trends_, call it a **zero-sum game**.) HFT players normally sell exactly as many shares as they buy – and just a millisecond later. Thus they have no effect(_) on actual supply or demand, or trends. (_ – Except to the extent that algorithmic feints or ruses can induce orders from non-balanced traders.) > > Key questions about HFT (and high-volume algorithmic trading in general) include: > > (1) Does it serve a public purpose? > (2) If not, should the public tolerate it? > (3) Does it create systemic risks? > > **HFT serves no public purpose.** “Price discovery” arises from informed supply and demand. HFT traders bring no new information. Perhaps (though I doubt even this) one can argue that a “correct” price is discovered a millisecond earlier than it would otherwise be discovered, but this would have value only if it makes the markets more efficient, i.e yields smaller _effective_ spreads. Does it? > > Answer: No. This can be deduced empirically, and from the fact that the market is fixed-sum. HFT traders spend huge sums on salaries and infrastructure. (Didn’t one build a dedicated fiber from Chicago to New York for 50 megadollars or such?) and still make billionS of annual profit. Where do these sums come from? Is it their reward for improving market efficiency? No, that would be impossible if the closing prices at the end of the day are invariant. In a fixed-sum game, someone’s gain must be someone else’s loss. And indeed, a large institutional manager claimed to have lost huge sums to HFT. > > **Should the public tolerate expensive activity with no public purpose?** This may be a philosophical question. I have no objection to professional poker players, and find no fault in stock traders who “game” the system if they do it legally. But it is a dogma of capitalism that entrepreneurs are rewarded for innovations that improve quality of life. Yet HFT profits have no public benefit; to the contrary, they mean each non-HFT trader is paying a penny more when he buys, and receiving a penny less when he sells. Even if the spread appears to be small, HFT sopping of orders can make the effective spread bigger than the apparent spread. > > The billions of dollars of HFT profits doesn’t grow on trees, and it doesn’t reflect new value added to the economy. > > Despite this one could still tolerate HFT if it was relatively harmless. The victims are mainly day traders, and other algorithmic traders. Buy-and-hold investors (and customers of low-turnover funds) suffer only very slightly. But I worry that **there is a risk of disaster**. What if an algorithm develops a bug and buys without selling or vice versa? Doesn’t the huge volume passing through computers pose dangers? What if a firm whose algorithm fails becomes insolvent? One thing we know – if there is a major problem, it will be Joe Taxpayer who is asked to help out in the aftermath. > > The Wall Street Journal article cited upthread seems to agree with me on this point: > > There is an unrelated question which might merit its own interesting thread. > > I’ve only tiny experience as a private investor, and none as an institutional trader, but I wonder about this. What portion of non-HFT trades are market orders? I assume large traders spoon-feed a series of limit trades, right? > > I’m not at all sure market orders are wrong for small investors. (For example, I once got bit with two days of commission for a very small limit order, because I forgot to place an All-or-None restriction. Admittedly that would be trivial with today’s tiny commissions.) This post is so full of misinformation I’m overwhelmed as to where to begin. This paper contradicts nearly everything you claim. [What do we know about High Frequency Trading?](http://pages.stern.nyu.edu/~jhasbrou/Teaching/2014%20Winter%20Markets/Readings/HFT0324.pdf) (pdf) Charles M. Jones Robert W. Lear Professor of Finance and Economics Columbia Business School Version 3.4: March 20, 2013 > [@](#): > > This paper reviews a substantial body of recent theoretical and empirical research on HFT so > that researchers, practitioners, policymakers, and other interested parties can become familiar > with the current state of knowledge and some of the outstanding economic issues associated > with HFT. In particular, the accumulated evidence needs to be taken into account in > developing equity and futures market regulations. > > Based on the vast majority of the empirical work to date, HFT and automated, competing > markets improve market liquidity, reduce trading costs, and make stock prices more efficient. > Better liquidity lowers the cost of equity capital for firms, which is an important positive for the > real economy. Minor regulatory tweaks may be in order, but those formulating policy should > be especially careful not to reverse the liquidity improvements of the last twenty years. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 4, 2014, 4:36pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/39 "2014-04-04T16:36:47Z")
Back to the OP’s question (before this gets moved to GD): The pdf I linked above has some HFT strategy examples in section 2.A on page 6. ---
**Author:** ![Doug\_Bowe](https://avatars.discourse-cdn.com/v4/letter/d/df788c/32.png) [@Doug\_Bowe](https://boards.straightdope.com/u/Doug_Bowe)\ **Post date:** [April 4, 2014, 5:02pm UTC](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121/40 "2014-04-04T17:02:47Z")
## Okay, name the news source and you’ll read that Eric Holder is asking for an investigation that HFT as insider trading. Since the order is public knowledge (granted, it’s public knowledge in microseconds) could a charge of insider trading be made? Would a charge of “Front Running” be more appropriate? From Wiki: Front running is the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. When orders previously submitted by its customers will predictably affect the price of the security, purchasing first for its own account gives the broker an unfair advantage, since it can expect to close out its position at a profit based on the new price level. The front running broker either buys for his own account (before filling customer buy orders that drive up the price), or sells (where the broker sells for its own account, before filling customer sell orders that drive down the price). [Previous page](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121.md?page=1) [Next page](https://boards.straightdope.com/t/high-frequency-trading-basic-questions/685121.md?page=3)