That's fair, but the reason isn't entirely due to bias. Few people outside the industry really understand market microstructure. It's a dry and complex subject. Legitimate criticisms are pretty subtle and get lost in the noise of "zomg guys with lasers front running Joe Average's 3 share GOOG trade!"
I no longer work in HFT. You can do everything better, smarter, faster than ever, and make less. It is one of the most brutally capitalist businesses: orders on exchanges are a pure undifferentiated commodity. The guy making the smallest spread fastest gets the trade. [1] Nobody cares if it's Virtu or Citadel or three guys in their garage. Think of a business like Wal-Mart's, but if someone finds a way to sell soap a half-cent cheaper, you sell 0 and go out of business.
And for the end users of the markets, that's great. Let these guys compete to make tighter markets or arbitrage prices sooner. HFTs play an intermediation role, helping other traders transfer risk immediately to lock in a guaranteed price, rather than waiting for someone else to trade with them. They're basically like CarMax or a grocery store: research what things are worth, buy at wholesale prices, sell at retail prices, and control inventory risk.
Some rich heir being a shoe in at Harvard where he skips half his classes and takes a spot from someone with academic interests bothers me too. It's not fair.
But I'm a bit less skeeved out by a school administrator judging someone as an individual, even if it's for a crappy reason like dad being a donor, than having them admit or deny someone just based on the color of their skin.
Just as I would rather work for a boss who hired his buddy from the country club, but harbored no prejudice, than one who refused to hire blacks, Jews, Asians, etc. who met the job requirements.
Is that surprising though? There's a strong correlation between pay and intellectual ability/education. There aren't many dull, uneducated engineers, doctors, lawyers, or executives.
If intelligence is at all heritable, you'd expect to see this. If educated parents tend to push their own children to become more educated, you'd expect to see this.
I wonder what the chart looks like broken down by where parents went to school or some non-financial metric. I would bet the children of well-educated college professors or journalists also score well, despite growing up with a more middle class household income.
Yes, instead we have holistic approaches which schools refuse to document for proprietary competitive reasons, and that holistic process has the same outcome as a racial quota. Very odd case.
There are a number of just-so stories you can make about them being either unfair or fair - but the education field doesn't consider this a settled question, and unless you're looking at the data in a systematic fashion with a clearly defined outcome and access to lots of control variables, you can't actually be sure the test yields the "best" students.
And indeed, the definition of "best" in this context is circular.
I'm not saying you're wrong, just that you can't be certain you're right.
Sure but you're fighting a strawman here. Nobody believes standardized tests are perfect or 100% accurate at determining ex post performance. We all know people who score well but lack discipline. People who support quotas don't merely believe tests are flawed, but believe they are flawed in extremely biased ways that need outside correction.
On most of these tests, you have to solve math or logic problems, or read passages and synthesize information. It's hard to imagine someone could do exceptionally well answering those questions quickly & accurately and not perform in a classroom, or be unable to do those tasks yet excel academically.
My statement doesn't argue against "this test is perfect" but rather a much laxer statement that they're "Race blind and fair" being axiomatically true.
It's entirely possible to have the latter be true without the former.
As for your "It's hard to imagine..." in my career teaching I've met both phenotypes.
I was under the impression that the test-makers have scrupulously avoided culturally-biased questions for decades, and yet left-leaning people casually continue tossing it around as part of their war on merit.
I avoid eating too many potato chips and I still overconsume them. Just because you know you have the bias doesn't mean you defeat it 100% of the time.
I agree that the effect is small if anything in today's society, however.
I agree totally. Tests can be slightly flawed, and rich kids can prep their way to another 50 points, but nothing else in life comes close in terms of fairness. Maybe sports and that's it. There's something noble about that.
Tell me where else a poor farmer's kid from Alabama, a child of refugees who spoke no English at home, someone from an unpopular religion, a kid who grew up in the ghetto without a father, someone from the working class who speaks with a regional accent, etc. etc. can compete on a pretty level playing field with wealthy elites?
Good schools are mostly good because of their student bodies.
At a basic level you need teachers who care, books and decent accommodations. If those basics aren't being met, then spending will help. And if those needs are met, it certainly helps to have really great, special teachers who push students a little further.
But I believe if you took the kids from a selective school and swapped them with kids from a school with frequent violence and truancy, the kids from the selective school would still have far better life outcomes, and find ways to succeed despite run down classrooms, less inspiring teachers, and dated books. They would succeed if you put them in an 1800s one-room schoolhouse, or didn't even send them to school at all. They had to pass a high bar for intellectual ability and their parents care about education.
100% agree. 100 years ago, if you didn't have access to a textbook or a teacher, you were largely shit outta luck. Today, with adequately motivated parents / students (and a moderate amount of resources, i.e. access to the internet and/or public library and the knowledge to seek things there), one can bypass these issues. One can even gain knowledge and skill that is far beyond the high-school level.
I actually wonder if the internet will magnify cultural differences over time. So the children who are motivated (whether intrinsic, parents, or culture) will get even further ahead by taking online courses, while the children who are not will fall even further behind.
It was wrong decades ago when the Ivy League had a soft cap on the number of Jewish students admitted, and it's wrong now when schools effectively do the same for Asians. They can nudge-nudge-wink-wink "Holistic approach" all they like, but when the data show an Asian student needs 120 more SAT points to get in, it's hard to see anything other than racial bias or de facto quotas.
I don't say this out of self-interest, I'm not Asian. If anything, these quotas help people from my background. I don't care. They are deeply unfair and antithetical to the American values of equal opportunity, fair competition, and not judging people on their race, gender, or creed.
And the students being pushed out by these rules are not rich or privileged. The rich and privileged kids in New York are in private schools that cost more than a luxury car for a year's tuition. Many are children of first generation immigrants.
They would simply vaporize. At the margin, people trade because the frictional costs (spreads, fees, pricing/tracking error, risk) of trading are low. Fewer people would trade.
HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down.
Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed.
Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year.
Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.
As noted elsewhere in this thread, I suspect new markets would spring up. If the underlying could only trade once a year, the options market would be huge.
Interesting idea, but how would you deal with these issues:
1.) Randomizing who receives contentious trades will just encourage order splitting and gaming. Sure some of that can be banned, but nothing stops big firms from putting each trading group into different legal entities or other tricks.
This also discourages traders from bidding their true most aggressive price. In time priority, you must, or someone else will snatch your trade. If you remove the reward, why take the risk?
2.) Being fast would still matter. Reality isn't quantized, so having access to relevant real world information or a proxy for such (trading activity in other markets or products) would still be an edge. Existing quantized trading points such as exchange auctions are still latency sensitive.
3.) The modern marketplace is interconnected. No ETF market maker will quote a tight spread if he can't confidently hedge his risk in the individual stocks. Going into a one second auction with random allocation is a lot riskier than just hitting the bid on Nasdaq, maybe paying an extra penny in the rare case when you're slow. A lot of liquidity comes from people running these arb/stat arb trades. It tightens spreads and helps keep prices in line. Why harm it?
4.) There is more to HFT success than speed and I don't think this would hurt them too much or take us back to 1997 with day traders sitting at home making big money. Virtu or some other HFT shop was the biggest trader on IEX, and they have a speed bump similar to this, just less extreme.
For 1), I'd randomize with proportional unit (share) representation, and I'd certainly be open to rule-prioritized execution (e.g. most-favorable taker first) if it didn't lead to degenerate incetives. Smart market design can incentivize people to play at their best price. For example: locational marginal pricing in wholesale energy markets...
2) I agree that the real world is quantized, but I think that a settlement tock to the bidding tick could be used to reduce the value of proximity. IEX actually implemented general latency with long runs of fiber, which is a really elegant fix. They couldn't make the rest of the world latent, so it's something like 700 microseconds, enough to remove colocation advantages, but only enough to solve for New York.
3) As far as I know, HFT's like to play in limit order and derivative books. It's where practices like flashing and spoofing have come from. Market orders are fraught with peril, especially if you don't know the matching rules for the exchange. As far as tightening the spread and aiding price discovery, I don't think that those two things are the same. If a security has naturally low volume, responsive high frequency trading can effectively be predatory.
4) I agree that there is more to HFT than just speed, but I view high frequency temporal arbitrage as an unnecessary market feature that provides the illusion of liquidity right up until that liquidity would truly be useful (since robots get benched when things go strange).
Granted, the temporal steps that I'm advocating here are a little provocative. The US could be solved in something like 200ms, and larger global markets, like currency exchange, are already fairly decentralized (though not as much as they used to be, as far as I know).
Either way, I don't think that NASDAQ can assure global temporal coherence, especially without controlling the entire network. Given that, it makes sense to design robust systems that don't pivot into rare modalities in exceptional cases. Just pull clock slew off the board.
1.) If you do it proportional to shares, then it introduces bad incentives to oversize orders. There's a reason why almost every market in the world uses price time priority in a realtime two sided auction.
2.) What problem does this solve? Proximity is freely available and relatively inexpensive. Barriers to entry for professional traders are much lower than the days of buying exchange seats. 10s of thousands a month sounds like a lot, but it's nothing compared to the costs of running a trading operation.
You could give every man, woman and child a rack at Nasdaq with a nanosecond trading system, and they wouldn't make any money. Proximity only matters to traders running latency sensitive strategies. These strategies have low margins per trade and can only profit through scale. Running them requires robust systems that take years to develop, capital, smart researchers, and data.
3.) Spoofing is illegal and people go to prison for it. HFT is just a catch all term for executing short term trading strategies with a computer. Most HFTs make their money through market making, arbitrage, stat arb, or some blend of those. All profitable trading can be cast as predatory, but that doesn't make it bad. Having accurate prices and more quotes in the market is a public good.
4.) So you believe it's good if S&P 500 futures go up 2%, nobody arbitrages the S&P 500 ETF, and John Smith comes to the exchange and sells his ETF shares 2% below their value? I'm guessing not.
Odds are you believe arbitrage and efficient pricing are important. If you believe that, then someone should do those trades, and they'll earn profit as a reward for correcting the price. Why shouldn't it be the person or machine who does it first and for the lowest possible margins?
I no longer work in HFT. You can do everything better, smarter, faster than ever, and make less. It is one of the most brutally capitalist businesses: orders on exchanges are a pure undifferentiated commodity. The guy making the smallest spread fastest gets the trade. [1] Nobody cares if it's Virtu or Citadel or three guys in their garage. Think of a business like Wal-Mart's, but if someone finds a way to sell soap a half-cent cheaper, you sell 0 and go out of business.
And for the end users of the markets, that's great. Let these guys compete to make tighter markets or arbitrage prices sooner. HFTs play an intermediation role, helping other traders transfer risk immediately to lock in a guaranteed price, rather than waiting for someone else to trade with them. They're basically like CarMax or a grocery store: research what things are worth, buy at wholesale prices, sell at retail prices, and control inventory risk.
1: https://meanderful.blogspot.com/2013/01/hfts-dirty-little-se...