Busting the Top 5 Myths About HFT By John D'Antona Jr. - February 5, 2020 Remember the HFTs? Not much has been said recently about these so-called nefarious exploiters of the market structure. But wait, thenews this weekfrom the U.K’s Financial Conduct Authority that found that high-speed trading practice of “latency arbitrage” is costing investors $5 billion a year.According to the FCA, traders and hedge funds who use high speed trading methods to gain an advantage in effect impose a “tax” on other investors who end up paying more to trade. But that’s not exactly true, according toJeff Mezger, director of product management at Transaction Network Services (TNS), a commonly held myth is that high-frequency trading (HFT) firms make things more expensive for everyone. Actually, HFT firms provide the liquidity needed to fuel the market, which makes it easier for investors to buy and sell. Here, in his own words, Mezger spells out the Top 5 myths surrounding HFTs as he sees it. Myth No. 1: High-frequency trading (HFT) firms make everything more expensive for everyone. Many people, both within the financial service industry and outside it, have a perception that HFT firms are predatory; they make all the money while individual investors lose – a zero-sum game. But that’s actually not true. For markets to work properly, you need lots of people participating and lots of money moving in and out from various sectors – i.e., lots of liquidity. HFT firms provide the liquidity needed to fuel the market, which actually makes it easier for individual investors to buy and sell: Without a certain amount of liquidity in a particular market or commodity, they become more expensive. Some allege HFT firms were responsible for the 2010 Flash Crash, but the crash actually proves these points; liquidity evaporated, everyone pulled out, and shares went down to a penny because no one wanted to buy. In fact, HFT firms can help prevent exactly these kinds of issuesby providing the liquidity that acts as a shock absorber for the natural ebb and flow of individual investors’ trades. Myth No. 2: HFT firms have special access to data. There’s a perception that HFT firms can gain information about the exchanges, including price, through certain backchannels that regular investors don’t have access to. That’s not quite true. These exchanges are heavily regulated by the Securities and Exchange Commission (SEC) and the U.S. Commodities Futures Trading Commission (CFTC), and one of the regulations is a mandate granting everyone equal access. There is a caveat to this one, however. The exchanges have different levels of service in terms of the market data they provide; the more someone is willing to pay, the faster they get information. This means it’s possible, in theory and practice, for HFT firms to get better information faster, but the fact remains that it’s available to everyone – even though not everyone wants to pay for it. There have been outcries in the past against HF traders who received information about the results of their own trades before the market does, with some saying this grants an unfair advantage. Yet HFT firms only get this information as it pertains to their own trade activity; they effectively pay for the right to get data faster in exchange for taking on risk. Myth No. 3: HFT firms drive smaller players out of the market. Another assumption is that HFT firms monopolize exchanges; through the dollars and technology they bring, they usurp some of the smaller players, thus driving them out. The first part does happen: It’s no secret that HFT firms bring a lot of money into an exchange (which is a good thing, as we saw in Myth No. 1). The myth here is that smaller players just hang up their hats and go home. The smart ones, however, know how to survive, by taking the same strategy they used in competitive, mature markets and airdropping it into emerging markets. Say a smaller firm makes a killing trading short-term interest rates on the CME, until the HFT firms come into the Chicago market and create more competition. Instead of closing up shop, what that smaller firm should do is look at other avenues. The Australian market (ASX) also trades short-term interest rates. This smaller firm can take its strategy; trade on another, less competitive exchange, like the ASX; and continue to reap the rewards. And while small firms may bemoan their lack of international resources, in fact, service providers are making it a snap to connect globally. The firm doesn’t need employees physically in Australia, or deep knowledge of the network routes and hardware providers there, or local broker relationships. Service providers bring all of this, taking the tough parts off the firm’s hands and creating access formerly only available to global conglomerates. Exploring these new avenues is part of the “adapt and adopt” mentality that anyone involved in the financial service industry needs to have these days. Myth No. 4: An HFT firm’s business model is solely based on speed. Some believe HFT firms make their money only because of the speed at which they trade – they get from one place to the other faster than anyone else. While this is the bulk of their business, it’s not the entirety of it. Like innovators in any industry, HFT firms also seek smarter ways of doing things via technology. We throw around the word “disruptive” so often these days because the new normal is the 2.0 version of anything; once a technology or methodology exists, you can expect that someone is going to find a better way of doing it. Instead of depending on speed exclusively, some firms are looking to other ways to trade – for example, building a trading strategy on clock sync technology, which synchronizes clocks around the world based on location to create an advantage. The future belongs to the disruptors (and the disruptors of those disruptors); it’s how we keep moving forward as a species. HFT firms are no different. Myth No. 5: HFT firms do everything themselves. Many accept the idea that HFT firms often are in a position to cull all their own information, build their own microwave towers, run all their own network routes, etc., and smaller firms don’t have the ability to do that, so that means they can’t compete. False. While this is true in some markets – no, a smaller firm is not able to build their own shortwave radio towers between Chicago and London– it’s not true on a global scale. Myth No. 3 touched on the idea of developing strategies for emerging and smaller markets and using service providers to allow smaller firms to compete. Here’s an open industry secret: HFT firms use these services as well, in emerging markets like Korea and Taiwan, giving them boots on the ground in a market they don’t know themselves. The idea that smaller firms can’t compete because they don’t have the money to do everything themselves is a myth; service providers have leveled the playing field in recent years, creating friendly competition and ensuring even small firms can play in the markets. Moving Forward The prevalence of these five myths points to a lack of understanding about many aspects of high-frequency trading practices and advantages, and it’s important to set the record straight. Having a better grasp of how HFT firms operate – and the ways smaller firms can capitalize on their advantages to become fierce adversaries – will move the industry forward and fuel competition, keeping markets humming and making everyone a buck. https://www.tradersmagazine.com/am/...+Liquidity&utm_campaign=Traders+Magazine+Xtra
Lot's of truth there. But the model is actually very simple. Reg Nms and exchange fragmentation is where speed is crucial along with ability to sub penny. That is it, HFT is legalized front running. It is actually that simple. Human front runs=jail. Computer front runs=100 of millions.
HFT = most used excuse as to why someone isn't profitable. Noticed zero change from hft give it up and move on people!
Nothing to do with being profitable or not for any trader here. HFT found holly grail and they exploit it until rules change. Most people here HFT has no impact or possible even better effect. But is is a legalized front running.
I've heard that there are 5 myths about 5 myths about HFT. 1. makes trading more expensive for everyone. Due to the fact that only the fastest and best shops are competitive, everyone else is throwing in the towel, which generally leads to less liquidity. Check your brokers 606 statements. Always the same names....and if the winner takes it all, who would trade against him, right? 2. HFT firms don't have special access to data, yet the data they get is so expensive that it is basically impossible for anybody with a budget of less that 100k/month (equities) to use that data. It's not a level playing field anymore, it's pay to play. And it's not just the data. What does this muppet think how much a column based database like KdB+ is per month? And a feedhandler? Does he really think, you can plug a priority datafeed into your eSignal?? 3. So you basically say that when the HFT come into your market, you should leave and look for a smaller market? 4. & 5. Speed is 80% of the business and service providers also cost a fortune. TL;DR: I don't know what this guy is smoking but I also want some of it. HFT basically killed the diverse market place that was locals, commercials and retail, because the market is basically tailored around HFT. He got one thing right, tho: The future belongs to the disruptors. While lit markets become more and more monopolized and illiquid, the whales go back to the basics and trade OTC. Just look at the volume of EUREX Clearing: https://www.eurexclearing.com/clear...otc-clear/interest-rate-swaps/clearing-volume If this isn't the biggest middle finger to exchange traded futures ... This will be the death of HFT trading in the long run, as especially the big boys are sick of getting picked off by HFT.
HFTs are the locals now. There are still commercials and retail. HFTs are going otc. Wherever there is inefficiency people/firms will exploit
There is no HFT when people negotiate via voice/chat. That's the idea behind it. Retail is handled by market makers directly, close to no retail order is routed to an exchange nowadays. It's HFT, some semiprofessionals and a couple of funds that are big enough to be able to fork out the money for scraping algos.
HFT just skim from the top, they don't directly effect how the market moves, but they make a profit, which means there is money going to them, which makes it slightly harder to make money, but it's not like the firms don't make big money anyway so no real difference. Some Autistic bloke somewhere, only heard 2nd hand, reported a exploit in the markets, got ignored so he used it got his account upto 48Mil from bugger all most likely before getting caught, hadn't spent literally 1 penny not 1 withdrawl, he's working from home in fraud department looking for other exploits, do a google search likely find it somewhere.
the market makers are the HFT firms. HFT/market makers are now the predominant players in OTC fixed income/etfs/ ... Who do you think is on the other side of an OTC trade? not a bank