I would be interested to hear the sequence that makes this true. Lets say I put a limit in on stock FOO at $32 and it fires and I get my $32 * n dollars. What did the HFT do to siphon value off my trade? Or off the stock for that matter?
At this stage, the matching engine observes that you want to buy at $32, and someone is willing to sell at less than $32. You trade directly with that person at $32.
It's actually illegal for any matching engine to match the $31.90 bid, they must cross trades at the NBBO.
You place a limit order to buy FOO at $32
Someone else offers FOO at $31.90
That scenario would result in a locked market, which can't possibly happen under RegNMS. The exchange that saw the offer for $31.90 is required to route-out to the exchange with a bid of $32.
A HFT algorithm buys FOO at $31.90
That also can't happen. Even without RegNMS, the exchange's matching engine would have paired the value investor with the offer of $31.90, though the execution price would actually be $32. The HFT participant won't even see the ask price in this scenario.
The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower.
So, in the interest of disclosure, do you do HFT? You seem to have an interest in defending the notion that high frequency traders have no overall effect.
Per the disclosure request : I am not an HFT trader, nor are any funds I invest in managed by HFT traders. Perhaps this makes me clueless :-)
To respond to your comment though,
"The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower."
I'm trying to figure out the linkage. What mechanism would connect the order pricing from a long term investor with the activities of an HFT trader? HFT works in the first and second derivative space of values and long term traders seem solidly in the linear space. Can you construct and example where the activities of an HFT trader are both visible too, and influential on, the pricing targets of a long term investor?
Oh I do have some Bank of America stock (one of the stocks called out in the article) which I bought in 2009 when they were pummeled by the Countrywide fiasco and their inability to get another CEO, sold half of it for a 100% gain, (net 50% gain on the total investment) and have watched the remainder go up and down. I got my 50% return (and that cash is working elsewhere) and I've got some extra shares that I could sell for anything over $0 to add to that gain (although if you want to do the annualized computation it gets lower if I holder it longer etc etc) but holding that since 2009 pretty much defines a 'long' holding.
Basically you cam imagine a market with only long term traders, there is a certain amount of money being generated by companies which feeds the profits of the market.
Now add some HFTs, these make a profit (there is empirical evidence for this claim). Now money is leaving the market without going to long term investors. Thus the long term investors are making less profit.
Now the big unsubstantiated assumption I have used above is that HFT adds no value to the market. I do not feel I am in any position to argue about whether this assumption is good or not. The above argument is presented in the hope that it makes things clearer and points towards what I think is the fundamental point which needs to be discussed: "Do HFT traders add value of a market?"
Comments
I would be interested to hear the sequence that makes this true. Lets say I put a limit in on stock FOO at $32 and it fires and I get my $32 * n dollars. What did the HFT do to siphon value off my trade? Or off the stock for that matter?
I'm not involved in HFT, but I imagine the following scenario is plausible:
You place a limit order to buy FOO at $32
Someone else offers FOO at $31.90
A HFT algorithm buys FOO at $31.90 and immediately offers it at $32
You buy FOO at $32 from the HFT algo
So you have lost potential profit on the transaction even though you technically hit your limit price.
You place a limit order to buy FOO at $32
Someone else offers FOO at $31.90
At this stage, the matching engine observes that you want to buy at $32, and someone is willing to sell at less than $32. You trade directly with that person at $32.
It's actually illegal for any matching engine to match the $31.90 bid, they must cross trades at the NBBO.
The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower.
So, in the interest of disclosure, do you do HFT? You seem to have an interest in defending the notion that high frequency traders have no overall effect.
Per the disclosure request : I am not an HFT trader, nor are any funds I invest in managed by HFT traders. Perhaps this makes me clueless :-)
To respond to your comment though,
"The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower."
I'm trying to figure out the linkage. What mechanism would connect the order pricing from a long term investor with the activities of an HFT trader? HFT works in the first and second derivative space of values and long term traders seem solidly in the linear space. Can you construct and example where the activities of an HFT trader are both visible too, and influential on, the pricing targets of a long term investor?
Oh I do have some Bank of America stock (one of the stocks called out in the article) which I bought in 2009 when they were pummeled by the Countrywide fiasco and their inability to get another CEO, sold half of it for a 100% gain, (net 50% gain on the total investment) and have watched the remainder go up and down. I got my 50% return (and that cash is working elsewhere) and I've got some extra shares that I could sell for anything over $0 to add to that gain (although if you want to do the annualized computation it gets lower if I holder it longer etc etc) but holding that since 2009 pretty much defines a 'long' holding.
Basically you cam imagine a market with only long term traders, there is a certain amount of money being generated by companies which feeds the profits of the market.
Now add some HFTs, these make a profit (there is empirical evidence for this claim). Now money is leaving the market without going to long term investors. Thus the long term investors are making less profit.
Now the big unsubstantiated assumption I have used above is that HFT adds no value to the market. I do not feel I am in any position to argue about whether this assumption is good or not. The above argument is presented in the hope that it makes things clearer and points towards what I think is the fundamental point which needs to be discussed: "Do HFT traders add value of a market?"