[jmrobertson]

Ehhhhh. yes. But that glosses over dark pools, some of the shadier exchange infrastructure arbs that go on, etc.

To be candid, I'm fully on the same page as you: what's going on here is no different than what a really good pit trader did from 1800's -> 2000. It's just the digital, semi-invisible version, and because volumes are so large, the money is exponentially larger as well.

But, that's not all the HFTs get up to; a lot of it doesn't hit public markets, or isn't particularly helping w/ efficiency.

[mruts]

Yeah, there are some shady dark pools and order types going around.

In regards to money, I think that decimalization actually really hurt market makers. There has been massive consolidation in the HFT space with most players either going out of business or being acquired. Profits are way down and latency arbitrage is almost impossible nowadays without billions of dollars of trading infrastructure. Profits have dropped by something like 90% in the last 10 years and the super-normal profits now (after consolidation) are just "normal."

The good thing about HFT is that with the right infrastructure, it's (almost) risk-free. The problem with HFT is that the returns don't compound, there's only a fixed amount of pennies that can be vacuumed up. This is in contrast with other non-HFT quant strategies, which can run tens or even sometimes hundreds of billions of dollars in capital and can make over 10% annually.

The story with HFT is the story with any new market. Players get in, make a ton of money. More players get in, now they are making a little less money. Even more get in, and now they aren't making enough money. Then the people not making enough get bought up or go out of business. And now the equilibrium has been reached: everyone is making "normal" money and everybody forgets about them.

And all of this is good, it's the natural market cycle. People like Elizabeth Warren were talking about how unfair HFT was blah blah, but now, no one cares. Fortunately, the entire cycle resolved before the government could get their sticky little fingers on it.

[jmrobertson]

That's a great point. I agree that this will sort of resolve itself, until MIT puts out some new Cat 8 ethernet or some major hardware jumps, the returns start plateauing quickly. When there's such a large barrier to entry, and with only a handful of HFT/DMMs moving the major volumes, that's somewhat of an systemic risk to the tune of a SysAdmin/DevOps guy screwing up a deployment, i.e. what took down Knight Capital

[atemerev]

A "dark pool", despite an ominous-sounding name, is just a type of exchange which does not display order prices and sizes. It is something in between of a regular exchange and an auction, better suited for posting and executing large orders. There is nothing shady in it; it helps larger players (like retirement / index funds) to obtain better prices for their large orders.

[jmrobertson]

Yes, not shady, but it totally unravels the argument concerning HFTs helping price discovery. I know the "hey retirement and index funds are doing it, think of the pensioners!" argument is common defense of it, but that's not at all the target audience of DPs. It's liquidity going off exchange, which hurts price discovery, simple as that. Considering how competent trade execution/slippage capabilities are for the types of broker-dealers that would be handling index/ret/pension volumes, that argument is nonsense

[mruts]

There's been a lot of lying by multiple banks to customers about the property of their dark pools. Saying they ban HFTs, or categorize them as "aggressive" when actually doing nothing, or having hidden order types for HFTs, etc etc.

Just to be clear, I mostly think that's fine and whatever, who cares, but there has been a lot of deception in the space.