I could be totally wrong, and perhaps I should read that blog, but working in HFT doesn't sound very rewarding except perhaps in a pure financial sense. It seems to me that the field contributes nothing to society, and has only negative externalities like raising barriers of entry to markets and using insane amount of resources.
Because of automation, the amount of resources used for trading have actually decreased. Computers are a lot cheaper that the many many humans who used to be involved in the process.
I remember the days in the early 80's when Merrill Lynch would charge $70 for a trade. That's the equivalent to $190 today. And people paid it because the low-cost firms like Schwab weren't well-known and people thought "If they're that cheap, they can't be any good."
I think it’s more nuanced in reality. There are liquidity providing HFT strategies that profit off the spread - this is good for people moving big size like Vanguard. Then there are liquidity taking strategies that profit by picking off quotes in anticipation of a probable price move. I don’t see how those strategies help Vanguard. Also, most HFT firms do a mix of both types strategies...
The markets need aggressive orders as well as passive orders. There is nothing inherently bad about liquidity taking. It is generally just as beneficial as liquidity providing. If anything, the misuse of passive orders is probably more common than the misuse of aggressive orders because passive orders can be used to influence a market without trading.
Even the taking of liquidity in the anticipation of a price move is not inherently bad. It is only bad if it degrades market efficiency (for example, by adding instability). An aggressive order that anticipates a price move due to an existing market inefficiency (for example, a sudden over-reaction to a report) benefits the market by speeding price discovery and adding stability.
As to your question of how an aggressive HFT strategy could benefit Vanguard, consider that if Vanguard places a passive order, it is because Vanguard hopes to attract an aggressive matching order. If they are unable to attract one within their time requirement, they will likely need to change their order to a less-profitable price. Their time requirement could be quite short during times of great volatility. An HFT strategy able to more-quickly recognize that Vanguard's original price was attractive would save Vanguard the cost of a price change. This benefit can be particularly large during significant market stress when participants are forced to liquidate assets in order to manage risk.
The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders. This essentially is a small tax (or rent) collected from all other market participants.
That is a common viewpoint, but one I strongly disagree with. I exclude illegal disruptive orders, since those are addressed by market reg disciplinary action. An aggressing order that provides new information to the market is not harmful. On the contrary, it makes the market more efficient by definition. If a market maker has to widen their spreads or lighten their liquidity, it is a sign that they are doing a worse job than someone else of determining market price (again, barring illegal activity). If a market maker is doing a good job, then they should be thrilled to have anyone take their passive orders all day long, because it will result in greater profit for the market maker.
>The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders
I think that this is common knowledge in market microstructure, but I've read about this specific relationship between market makers and adverse selection in the book, "Trades, Quotes and Prices".
I think it's fair to say that someone is going to contribute less to society working on HFT than they would by using the same skills to work at NASA or SpaceX, though
If you have to justify the contribution to society in terms of the stock market instead of some materially useful metric like meals served, people put in housing, technologies invented or some such thing, there are ways to provide retirement plans that have nothing to do with the stock market.
Thinking of the stock market as merely "a way to provide retirement plans" is wrong. It costs money to serve meals, put people in housing and invent technologies. Where does a lot of that money come from? Our financial system (of which the stock market is a key component). A better functioning financial system enables progress in lots of other industries.
You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions. The reason I cited retirement plans is that is the most sympathetic argument I could think of for caring about the stock market going up. Only ~20% of Americans own stocks, so it going up basically just enriches 1/5th of the population at the expense of the rest.
You can imagine a successful financial system without a stock market if you don't know much about financial systems, in the same way that you can imagine a jet flying without wings if you don't know much about aerodynamics.
I believe that the rise of importance of finance has been a net good for humanity, but I know that's an unpopular opinion and I've seen good arguments that it's a net harm. But I don't think you can make a reasonable argument that we could have a modern world anything like the current one without stock markets. Banks and credit unions don't, can't and shouldn't provide the kind of funding that equity markets do.
You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions.
Not really. A financial system that only consisted of debt and not equity would not be able to support anything like our current economy. We would all be much poorer for it. Loans are simply not suitable for a huge variety of financial risks.
> It seems to me that the field contributes nothing to society, and has only negative externalities like raising barriers of entry to markets and using insane amount of resources.
I thought the same way for a long time.
HFT helps make markets more liquid and (somewhat) may aid price discovery.
Now, assuming you buy that, the standard response is “sure, but how does pouring all these resources into shaving picoseconds off of a transaction help the world?” Fair point.
In my mind, the markets are really just a giant computer running a resource optimization problem whose inputs change constantly. Improving the latency of getting a result back can open up completely new applications.
This is a bit hazy, but think of what is possible with todays computers versus those of fifty years ago. Both can perform the same calculations, one is just faster, yet just making calculations faster has changed the world.
HFT means speeding up the computations for the allocations of resources for the entire world. This is a really important set of calculations- it affects, indirectly, almost every human on the planet. Making this faster by just a tiny fraction can make it more efficient and when that efficiency is multiplied by the trillions of dollars involved, that can mean huge savings for humanity as a whole.
Or, you know, the benefits could all be spent on hookers and cocaine, your choice.
I'm generally supportive of HFT, I think the massive reduction in total profits to market makers relative to 20 years ago is proof of a positive-sum efficiency gain. But I'm not sure I buy your argument for why the nanosecond arms race is good.
Computers getting faster has allowed us to do more and different stuff with computers. What are the actual benefits of HFT "efficiency"? If stocks had an auction every millisecond wouldn't that still be plenty fast enough for any practical purpose?
Only other HFTs will notice or care that AAPL's price got updated in 1 nanosecond instead of 2. Or to go the other way, how would we be better off if stocks ticked every femtosecond? Every attosecond? Is there some limit where the benefits of this "efficiency" aren't worth the resources to pursue it?
But faster price discovery doesn't actually do anything. Outside of other HFT firms, efficient pricing only matters for large events that happen on a macro timescale - share issuance, buybacks, dividends, etc.
Unless one of those macro events occurs, knowing whether a stock is worth $10 or $11 doesn't actually matter - there's no efficiency gained or resources allocated based on that difference.
Resources aren't allocated on a nanosecond timeframe, no matter how fast your trades are. Actual resource allocation happens on a weeks to months timeframe.
It doesn’t “raise barrier to entry”, it lowers it. Before HFT spreads on stocks were hell, imagine a quarter size spread. Now it’s mere pennies, fractions.
Also, for people who love computers, HFT is very exciting. Imagine a job where no optimization is too premature, where everything must be done to get the fastest possible speeds and push machines and software to physical limits. Very challenging and very fun. And the rewards are great!
This comment really hits the nail on the head. Want to write code that never hits the L2 cache? Write packet headers before you even know what's going inside? Do the math to see if Starlink provides a better latency based on distance between markets? The questions and answers are endless, difficult, and rewarding to solve.
Love reading about HFT optimizations, unfortunately it’s rare since a lot of the techniques used are basically trade secrets. Everyone’s always looking for an edge.
The other replies have valuable points, I can only offer my own. I design low latency fiber routes (not wireless like sniper) and find HFT's are willing to spend a large amount of money for infrastructure (AKA will let me trench 100 miles of fiber if it pencils out). This then translates to better connectivity for regular internet users and lower costs for average internet users, as the primary infra providers are recouping their profits on the high margin customers.
By that measure most of Silicon Valley is not “rewarding”. While reasonable people can debate HFT’s benefit to society and resource use, how does HFT raise barriers of entry to markets?
I guess it depends on your underlying viewpoint towards markets and capitalism.
I certainly don't think liquid financial markets and efficient asset prices qualify as "contributing nothing to society". Those components are extremely critical to the efficient allocation of investment capital, and overall functioning of the broader economy.
But if you're generally skeptical of markets and capitalism then you may not agree. However I'd say that should have a lot bigger fish to fry than the $2 billion HFT industry. For example the $300 billion advertising industry, or the $100 billion accounting industry, or the $100 billion credit card industry.
It is 100% for making money by gaming the current systems.
Perhaps one day something good comes out of it. For example: Formula 1 racing is also totally not necessary, but can bring nice innovations for the 'normal' automotive industry.
Are the lines on the map literal? I would think propagation goes around vs. linear but maybe they're using helical antennas so it is high gain?
I'm probably confused I'm vaguely aware of the concept with dedicated lines/least latency/etc... I saw a picture of a tower/thinking it's about transmission...
> What’s more, if there is only one tree (or one leaf) between two points/dishes, the network is dead. Paths need to be free of obstacles.
Question: Are there typically any laws against blocking line-of-sight like this as long as you stay on your own land? Such as sending up a hot air balloon "sign" that just happens to be in the way of the expensive setup?
