I hate to say it, but i don't see that much difference between yesterday's human-driven liquidity providers (floor traders) and the machine-driven liquidity providers of today. Except that as a local in the pit, I often possessed exogenous information, yet to be incorporated in the market. Predatory algorithms must rely on their endogenous actions to trigger the desired outcome.

Of course, in my own version of strategic sequential trading, I would often hit bids and lift offers, in search of stops, only not quite as fast or unemotionally. Yet all of this was easily rationalized as our due privilege for the risk incurred while providing liquidity. Ceteris paribas, we did this for the same reason a dog licks his balls… because we could.

Perhaps, if Goldman wasn't Obama's largest campaign contributor, and SEC officials didn't have a quid pro quo for job placement in place with the private sector b&ds and law firms, and the exchanges hadn't gone for-profit, we might not be discussing this topic.





Speak your mind

4 Comments so far

  1. Danimal on April 2, 2014 11:41 am

    I think you are confusing providing liquidity with adding volume. I would argue hitting bids and taking offers is not adding liquidity. Adding liquidity would be joining the offer, or fading paper. Most of the argument against hft is they are front running orders, not stop hunting. My personal feeling is they submit tons of orders (quote stuffing) not to be filled, but to manipulate the market, and that is (or at least was) against the rules. I would like to see a rule saying orders need to be valid for a minimum amount of time, say1 to 3 seconds, so a human can act upon said order.

  2. Andre wallin on April 2, 2014 2:04 pm

    the argument in flash boys book is that hft firms dont take risk and displayed prices on the screen are fake and dont get filled because hft jumps in front of you.

  3. jeff watson on April 4, 2014 2:22 pm

    Danimal. HFT has been around since old man Rothschild had the fastest communications and was able to scoop Napoleon’s defeat to the chagrin of the other side at the exchange. Nothing wrong with better technology, but lots wrong with extra rules designed to hurt a particular class of traders. HFT are a legal, legitimate force in the market. People tend to blame something for their losses, and HFT is now the whipping boy, much like the abuse locals like me took for years. If HFT is a winner, common sense would dictate that one would go with the new technology and develop their own plan. And as a person who knows my way around a pit after a 20 year tenure, quote stuffing is nothing new, we used to do that all the time. The tricks we played on each other to get a fill or deceive each other could fill 20 large volumes.

  4. Danimal on April 7, 2014 11:30 am

    I appreciate your response,Jeff. I have no problem with them being faster, and I in fact made a living for a number of years by being faster than others trading the same strategy. My problem is they are breaking the rules by placing and canceling orders in an attempt to manipulate the market. If that is the case, then it shouldn’t be allowed. Most argue that they take such small amounts per trade the retail investor isn’t really hurt. If I steal .10 from you, you’re not really hurt. Is it then ok if I steal .10 from every person on earth?


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