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HFT not all the same

  • Mon, Mar 23, 2015 - 04:38pm



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    HFT not all the same


There are two types of HFT trading.

One is "electronic market-making" where a computer program puts out both a bid and an offer for an underlying item, with the goal to profit on the spread.  These HFT traders are really good for the market, since they can provide the same service as a human, but once the code is written, you don't have to pay them anything and – presumably – over time they collect enough pennies from the spread to make the risk worthwhile.  Spread ends up narrowing with enough of these in operation, which is a win for all participants.  Presumably Bart was speaking of those.  (I'm giving him the benefit of the doubt here)

The other HFT traders are the penny-stealing weasels, who have a special deal with the exchange that allows them to basically see other people's trades before they hit, front run them, and thus steal pennies from them and then re-sell that stock to the original bidder at a slightly higher price.  They live in dark pools, and on BATS – anywhere that they can get a special deal from the exchange to get faster access to quote & trade data than anyone else.  They add nothing – they only engage in rent-seeking.  Theft.  Simple fix: exchanges don't sell them faster-than-normal access, problem is solved.

But the weasely exchanges make money on the deal.  So they faciliate the front-running/stealing.

Except for the IEX exchange.  Which is where I send all my trades.  I'm too small a fish to be front-run, but I like to support the good guys.