An underrated value drain of HFT on the wider world is the black hole of incredibly talented people it sucks in. But there's no good answer to "How do you fairly compensate these people for their skills in other industry?", because the honest answer is "They (almost) always don't".
People who want to have an impact on the world and have the skillset to be a candidate in these types of firms "should" work for these firms, because the expected value of doing anything else is so paltry in comparison. Maybe some of these people go on to realize their original dreams; many do not. This is a well appreciated problem in tech these days, where Google and its peers were hiring so many of the best and brightest who would be a 10x at any small-mid size company and putting them to work at, like, Google Toolbar extension maintenance.
Of course at HFT firms these people are going to be more intellectually (and financially) stimulated than they would be elsewhere, but the inherently secretive nature of these firms mean that the techniques, knowledge, and skills developed at these firms almost never see the light of day, beyond a few select choices (Jane St's annual 'What the interns have wrought' gives a tiny slither of the type of things they develop). I have no doubts that there are secret forks of FOSS projects which have efficiency and performance savings at these firms which simply can never see the light of day because companies (correctly) acting in line with the incentives to not give up any edge they have, no matter how small.
You only need to look at the type of job listings posted for CitSec or whoever to realise that it's not just math Olympiads who these firms suck in: software engineers, highly specialized FPGA engineers, weather analysts, and only ever the best of the best.
What could these people achieve if they weren't just trying to save a few μs on trade execution?
The problem is that the argument that HFT is economically "small" of the article is wrong, you can't look at renueve for that you have use profit. Profit is the money that can be used to innovation and outcompete rivals, Google and tech are also small if you look at renueve but they still suck up all talent because they are giants in terms of profit.
Suppose there is news which means that Apple(~$3 trillion market cap) is under(or over) valued by 1%.
And let's say that one could capture just 0.1% of this price difference by being the first to get ahold of these news and trading on it.
That implies you could make a profit of $3 trillion*1%*0.1%=$30 million just by being something like 0.000001 seconds faster or whatever than the competition. So you'd be willing to spend up to $30 million to be first, the more competition there is the worse it gets.
Meanwhile the social benefit of updating the price to it's correct value 0.000001 seconds earlier is obviously(how could it not be?) ~$0.
Private benefit=$30 million
Private cost=social cost=up to $30 million
Social benefit: ~$0
So DWL is $0-30 million.
Now it's certainly true that there are positive externalities that one has to take into account but I see no theoretical reason to believe they happen to always exactly happen to balance out the external costs, nor does it seem likely that in this example it would amount to a huge number like $30 million.
Can you steelman some strong arguments against HFT and then evaluate those arguments? What comes to my (non-expert) mind is: speculation on commodity markets causing an increase in food prices which disproportionately affects the poor in developing countries, sometimes making basic foods unaffordable by them. If that is one of the effects of HFT, even indirectly, it seems pretty difficult to defend. Maybe you've already addressed this indirectly in your post; any help for me to better understand would be appreciated.
wars, global warming and fiat money printing increase food prices. ask gpt. HFT is just market mechanic for betting which is on itself useful. HFT is just form of auction. auctions are good.
I don't think the comparison of employee counts or revenues really supports the argument for HFT. Take the comparison between HFT firms and Google, for example. Yes, Google employs 5-10 times as many people, but Google provides a broad array of goods and services that benefit billions of people. Is the benefit of improving liquidity and narrowing spreads really comparable to the benefit of 10-20% of Google?
HFT is just automation with decentralized competition. These tasks used to be handled by former Chicago high school football players at ridiculous multiples of transaction fees to what we get today, and preposterous levels of corruption and insider graft (the specialist for Oats futures was married to Quaker oat fortune's daughter for example). I've been saying this since 2009 when the whole world went into a moral panic about these guys because they had the temerity to keep making money in a down market.
It's a small enough industry that it hasn't been able to self organize a trade group and hire a PR firm, where the other team (people who pay liquidity fees: merger arb insider trader types) actually has; they even hired Michael Lewis at one point.
To me it seems the normal economic process in action - identification of personal and economic opportunity and allocation of appropriate resources, within ethical, regulatory and legal boundaries. Should the opportunity change or move, over time resources will be re-allocated. Very interesting article, thank you for sharing.
I've just finished reading Michael Lewis's 'Going Infinite' ref the FTX collapse and Bankman-Fried. What interests me most is how well-developed the HFT firm recruitment and screening process is, in terms of identifying the candidate attributes most likely to lead to trading success. SBF and Ellison being two successful ex-Jane Streeters, as well as many other FTX and Alameda ex-employees.
An underrated value drain of HFT on the wider world is the black hole of incredibly talented people it sucks in. But there's no good answer to "How do you fairly compensate these people for their skills in other industry?", because the honest answer is "They (almost) always don't".
People who want to have an impact on the world and have the skillset to be a candidate in these types of firms "should" work for these firms, because the expected value of doing anything else is so paltry in comparison. Maybe some of these people go on to realize their original dreams; many do not. This is a well appreciated problem in tech these days, where Google and its peers were hiring so many of the best and brightest who would be a 10x at any small-mid size company and putting them to work at, like, Google Toolbar extension maintenance.
Of course at HFT firms these people are going to be more intellectually (and financially) stimulated than they would be elsewhere, but the inherently secretive nature of these firms mean that the techniques, knowledge, and skills developed at these firms almost never see the light of day, beyond a few select choices (Jane St's annual 'What the interns have wrought' gives a tiny slither of the type of things they develop). I have no doubts that there are secret forks of FOSS projects which have efficiency and performance savings at these firms which simply can never see the light of day because companies (correctly) acting in line with the incentives to not give up any edge they have, no matter how small.
You only need to look at the type of job listings posted for CitSec or whoever to realise that it's not just math Olympiads who these firms suck in: software engineers, highly specialized FPGA engineers, weather analysts, and only ever the best of the best.
What could these people achieve if they weren't just trying to save a few μs on trade execution?
The problem is that the argument that HFT is economically "small" of the article is wrong, you can't look at renueve for that you have use profit. Profit is the money that can be used to innovation and outcompete rivals, Google and tech are also small if you look at renueve but they still suck up all talent because they are giants in terms of profit.
What about rent-seeking:
Suppose there is news which means that Apple(~$3 trillion market cap) is under(or over) valued by 1%.
And let's say that one could capture just 0.1% of this price difference by being the first to get ahold of these news and trading on it.
That implies you could make a profit of $3 trillion*1%*0.1%=$30 million just by being something like 0.000001 seconds faster or whatever than the competition. So you'd be willing to spend up to $30 million to be first, the more competition there is the worse it gets.
Meanwhile the social benefit of updating the price to it's correct value 0.000001 seconds earlier is obviously(how could it not be?) ~$0.
Private benefit=$30 million
Private cost=social cost=up to $30 million
Social benefit: ~$0
So DWL is $0-30 million.
Now it's certainly true that there are positive externalities that one has to take into account but I see no theoretical reason to believe they happen to always exactly happen to balance out the external costs, nor does it seem likely that in this example it would amount to a huge number like $30 million.
See also: https://www.thebigquestions.com/2014/04/21/high-frequency-rentseeking/
Can you steelman some strong arguments against HFT and then evaluate those arguments? What comes to my (non-expert) mind is: speculation on commodity markets causing an increase in food prices which disproportionately affects the poor in developing countries, sometimes making basic foods unaffordable by them. If that is one of the effects of HFT, even indirectly, it seems pretty difficult to defend. Maybe you've already addressed this indirectly in your post; any help for me to better understand would be appreciated.
The author has addressed this comment, here: https://x.com/cremieuxrecueil/status/1832935775182418109
wars, global warming and fiat money printing increase food prices. ask gpt. HFT is just market mechanic for betting which is on itself useful. HFT is just form of auction. auctions are good.
I don't think the comparison of employee counts or revenues really supports the argument for HFT. Take the comparison between HFT firms and Google, for example. Yes, Google employs 5-10 times as many people, but Google provides a broad array of goods and services that benefit billions of people. Is the benefit of improving liquidity and narrowing spreads really comparable to the benefit of 10-20% of Google?
https://christophermeestoerato.substack.com/p/wall-street-casino-must-go?r=12utpl
Superbly written, as always!
HFT is just automation with decentralized competition. These tasks used to be handled by former Chicago high school football players at ridiculous multiples of transaction fees to what we get today, and preposterous levels of corruption and insider graft (the specialist for Oats futures was married to Quaker oat fortune's daughter for example). I've been saying this since 2009 when the whole world went into a moral panic about these guys because they had the temerity to keep making money in a down market.
It's a small enough industry that it hasn't been able to self organize a trade group and hire a PR firm, where the other team (people who pay liquidity fees: merger arb insider trader types) actually has; they even hired Michael Lewis at one point.
To me it seems the normal economic process in action - identification of personal and economic opportunity and allocation of appropriate resources, within ethical, regulatory and legal boundaries. Should the opportunity change or move, over time resources will be re-allocated. Very interesting article, thank you for sharing.
I've just finished reading Michael Lewis's 'Going Infinite' ref the FTX collapse and Bankman-Fried. What interests me most is how well-developed the HFT firm recruitment and screening process is, in terms of identifying the candidate attributes most likely to lead to trading success. SBF and Ellison being two successful ex-Jane Streeters, as well as many other FTX and Alameda ex-employees.