I’d say point 1 is somewhat true. You need market makers for an efficient market and they should get paid for offering two side markets. But running to other exchanges to front run your order is predatory. Point 2 I’d argue against. Some algorithms are even built into chips now, when you keep everything so small for speed that you can’t see a 15 percent drop in a minute or your algorithm starts trading blue chips for pennies theirs a problem. I think HFTade they crash worse. I don’t know if I’ve even heard a retail trader claim a big win in that crash. Who the hell would send any order into that chaos. It’s all HFT against each other.
You talking about Sarao. He was not HFT, He was using spoofing on CME, which is illegal under CFTC rules.
HFTs are mostly active on the equity market and not on futures, options or spot FX. Correct? May I know why?
Because CME futures are traded on a single venue, there is no market fragmentation. Stocks on the other hand have like 30 lit venues plus who knows how many dark pool. Also, there are no rebates and you cannot subpenny. A tick in futures is a tick.
The new world is now a war between machines. For some perspective, in 1999 at the height of the tech craze, there were about 1,000 quotes per second crossing the tape. Fast forward to 2013 and that number has risen exponentially to 2,000,000 per second. And yet there are fewer market participants today and actually less trading. All this noise comes from the High Frequency guys trying to game each other or fool traders. Today, 90 to 95 percent of all quotes emanate from High Frequency machines…… This doesn’t imply share volumes just quotes traveling on the tape. Eric Hunsador - Nanex A top government economist found that HFT firms are taking significant profits from what they call traditional investors, or those who are not using computer algorithms. There are mostly good HFTs that provide counter party risk, than their & the predatory tick/penny jumpers that spoof/layer, quote stuff, & herd with no real skin in the game, these are the ones that need to be stomped out. Nothing alleged about it as the author claims. The SEC & CFTC have concluded the flash crash was significantly amplified by HFTs. The author says the public should have stepped in to buy stocks at 1 cents, that's a hoot since most brokers halted trading when the stub quotes were far away from the NBO. Exchanges have a cozy relation with the predatory front running HFTs, they make a lot of profits from this. Despite being caught giving HFTs hide & slide orders and faster data feeds they have shown no real effort to reel it in. Check the Cattleman's letter to the CME. http://m.futuresmag.com/2016/01/25/cattlemen-say-markets-are-broken-there-fix The HFT era has made mini flash crashes routine - from the most liquid futures to equities. Japan, France, to name a few impose fines for high rates of cancelled orders - we aren't we? Is trading cheaper today? In 1990 the avg trade size was 1,600 shares, now it's only 200. To not get clobbered by HFTs most informed traders slice their orders into smaller 100-200 shares - that raises the commissions 8 fold as compared to the avg 1990 order, you also get poor limit order markups now. Nearly all of the profitable intra-day traders pre HFT had to adapt by lowering their trading frequency & increase their holding times. When the Fed/central banks are no longer propping up the market what will happen with price discovery when the liquidity takes a dive? Something as small as a Trump Tweet can trigger a mini flash crash now, hate to see how ugly it could get in a bear market?
1) HFT reduces the cost basis for the prime brokers trading operations (they love it). 2) HFT does have an informational advantage (relative to other participants). 3) People who don't understand market structure will not do well. HFT is structural. 4) HFT is based on speed, but they use speed / exchange membership / informational advantage to trade strategies and enable advantaged players to trade strategies. 5) HFT is just a group of market participants. The last part about "having a better grasp of how HFT firms operate..." is true. If you can figure out what these firms are doing, you can get the drop on guys who just watch price. HFT is disruptive, especially for the traders that don't understand it. It can make their entire style/strategy redundant and a guaranteed negative return. I love it. But that's because I studied market structure and microstructure for years.
One more comment on HFTs since I played the devils advocate looking at the darker side of HFTs. We are in golden era for trading. * Most of the HFTs are simply doing clean order executions, overall I think there are more advantages for us nimble retail traders in this era. * It used to be the human market makers that mugged us & the trading costs used to be very expensive. * It is a good idea to learn all you can as to how the HFTs operate, they leave some foot prints that are somewhat repetitive which can be use to gain a bit of an edge in certain conditions.
The trading strategies that these 'machines' used by HFT is for fast and so frequent, normal humans cannot do it. they pay only like 25 cents a trade or less and do like 1000 trades a day each making a few bucks. A human trader cannot compete like that . that is why all the prop trading firms of the 1990s no longer exist. HFT offer no liquidity as they don't hold overnight and basically frontrunners of client orders. from what i was told. they are just market makers without market maker obligations and market maker rules. this how traders used to make money.. ie a client wants to sell 10,000 shares and illiquid so the trader would sell 10000 shares and then buy it back cheaper...or buy the shares from the client and sell it higher. A tax on value of trade or higher commissions would make the business model of the HFT machines obsolete. it would be the black swan of HFT with any regulatory changes or increase in cost. professional traders pay 3 times more in data fees. and commissions for retail is a lot less than in the 1990's back then small traders with no money cannot participate in futures or in the NYSE. the market mechanics and fees and cost less than in 1980. traders and speculators were still making money in the 1980's so people complaining about commissions ...these commissions is a cheap as you can get. in terms of commissions. for futures it's only $1/trade. but these HFT spend like thousands in commission per month and day so the exchange is making a lot of money from the HFT 'participants.' these HFT are just market makers and daytraders. they add no value to the 'market' like parasites i n the marketplace they live off or leech from the market. Human front runs=jail. Computer front runs=100 of millions.[/QUOTE]