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[newbie Q] HFT


meiroy
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You're not alone.  The SEC is asleep at the wheel and usually takes a few years before they act on something.  They add nothing to the market and are basically glorified front runners.  They have huge lobbyists though as the trade so much everyone in the system (except investors) gains from them being in business.

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Could someone please explain why HFT is allowed? I just don't get it. Thanks.

 

It's sort of the same thing as why are derivatives allowed?  Why are stock options allowed?  It serves a purpose, although less so in terms of HFT.  The geniuses behind Wall Street like to get creative, seeking out any way to get an edge, so you have such innovation...if you can call it that!  Once there is enough people on the bandwagon, then as Given said, they carry much more clout by the dollars behind them and the lobbyists they hire.  And once they are entrenched, you cannot get rid of them.  Thus even more important to not follow the herd.  Cheers! 

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  • 3 weeks later...

Well, options, shorts and their pals indeed have a purpose, one might consider them unnecessary but they do have a well defined financial [?] purpose. HFT, on the other hand, seems to be something completely technical and detached from the actual idea of the market.

 

It reminds me of the first person shooter I used to play many years ago in a land far away... I think it was the first version of DOOM which could be played online.

 

This game required deep concentration and fast reflexes, you would go around in some dark environment looking for your friendly enemy opponent to shoot them on first sight. A fast reaction meant success and a delay would be having your head blown off to be splattered on the walls.

 

Other than the speed of mouse and keyboard clicking, to determine the result of your reaction, it depended on the speed of the connection (i.e. latency).

 

Now, in those days everyone had slow modems, those thingies which used to bridge between the digital signaling of a computer and the analog signaling on the telephone lines. The playing field was leveled. Everyone had a decent chance.

 

Then one day, the local telecom company started to market ISDN, one of the first digital connections which was offered.  It allowed a far faster connection to the game, some of the heavy players bought it even though it was quite expensive, only so they could have that extra edge.  What it meant to the rest of us with the modems, is that they could easily pop our heads without too much effort. The game wasn't that much leveled anymore, nor was it fun.  At one point one of the players was actually sitting at the telecom company and was zipping around like a ghost shooting everyone on sight, invincible. 

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I like the doom analogy. Brings back memories :)

 

Technically, the original doom had a type of connection that meant that everybody was synchronized and nobody was lagging more than the others. But Quake had a client-host model where lag was very important. It's possible that later versions of Doom based on the open-sourced code use a similar model, though..

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You are absolutely right, HFT has no logical place in a stock market which is essentially a price discovery mechanism.

 

I really hope it is outlawed soon, even though I have a very good mate who runs an HFT fund, he knows I feel this way.

 

They will put up a good fight though and they can rationalize their arguments with math and modern economic theory bs.

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