undefined | Better HN

0 pointstptacek15y ago0 comments

That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms?

What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading?

Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?

0 comments

5 comments · 2 top-level

yummyfajitas15y ago· 3 in thread

What's the win to society to "mitigate" an "incentive"?

The main incentive is reducing time and energy devoted to a zero sum game.

A hypothetical: imagine a sunken pirate ship is discovered. Now suppose 10 crews of divers get into a race to retrieve the pirate gold. It's useful to society to bring up the gold. It might be useful to society to have a race between 2 crews to bring up the gold, to make sure the first crew doesn't dilly dally. The gain to society is $GOLD - 2 x $DIVER_COST, or perhaps $GOLD_AFTER_LONG_DELAY - 1 x $DIVER_COST. On the other hand, having 10 crews of divers all competing for the gold is pointless - the gain to society is $GOLD - 10 x $DIVER_COST, which is 8 x $DIVER_COST less than if 2 diver crews chased the gold.

HFT is basically the same situation as the race for pirate gold - a lot of smart people in a race to create a fixed amount of alpha. We might be better off if they were creating new alpha elsewhere instead of all simultaneously chasing after the same alpha.

(That's not to say I'm advocating a ban on HFT on this ground. A certain amount of effort devoted to HFT is certainly a good thing, and I doubt the government would get things right. I just don't think the market is getting things perfect either.)

tptacekOP15y ago

So this argument makes a lot of sense, but you see that it's not the argument that's being employed against HFT in general, right?

What I see are a lot of people arguing that the HFTs are getting an unfair edge on other traders, as if some main street stock picker was actually in competition with an HFT prop trading shop.

My sense of it is that many of the people making this arguments believe that were it not for HFT's, people would have frictionless access to a real efficient price for any instrument they wanted to buy, when in fact they'd just be dealing with a much clunkier and less reliable set of middlemen.

yummyfajitas15y ago

I know this is an uncommon argument against HFT - I've only heard Tyler Cowen pushing this argument, but it's the one I find most plausible.

As I said, a certain amount of HFT is a good thing. If I thought it was harmful, I'd quit my job as an HFT programmer and find something else [1]. I'm just pointing out that there are costs, which don't necessarily outweigh the benefits after a certain point.

[1] This was a major reason why I quit my job as a postdoc, rather than trying to become a professor. I believe college is mostly rent seeking and I don't feel it's right to participate in that.

2 more replies

rgarcia15y ago

As a fellow HFT programmer I sort of think of HFT as another asset class: eventually (as more divers go for the gold) the returns will be on par with alternative asset classes. This is the beauty of capital investment and the free market--if an industry produces outsized returns, then capital/resources/effort will be poured into that industry until the returns diminish.

klochner15y ago

   That's slippery slope logic. If the pricing is right at
   1s, why pour money and talent into getting it right at 
   100ms?

I'm saying there are negative externalities[1], which are known to cause market inefficiency. Negative externalities typically look like "slippery slope" arguments, when in reality there is an appropriate level of penalty/tax/etc that restores efficiency.

   Meanwhile, you're effectively vouching for a comment 
   that models the markets as a closed system of people 
   dividing up a single pot of money. Isn't it plain that 
   such a model is wrongheaded?

I'll concede it's not zero-sum, but surely you also will concede diminishing returns to liquidity. I'll also concede that my original "money sink" comment was hyperbolic & inflammatory.

[1] http://economics.fundamentalfinance.com/negative-externality...

j / k navigate · click thread line to collapse