The fast market makers buy and sell lemonades at $1.00 and $1.01 respectively what banks are buying and selling for $0.10 and $5.00. Our customers are everyone that trades with us. We tighten spreads and save institutions millions in execution costs.

You're trying to paint every person working in finance with the "evil brush". There's more to it than that. You're frustrated with the collapsing housing market. Frustrated with corrupt corporations. Not every financial firm is Enron. Keep that in mind.

Thanks for the ad hominem. If you care to elaborate on any of the arguments posed, I will be happy to hear it.

Care to elaborate?

For every trade, there is a buyer and seller. Buyer makes X, the seller loses X (barring fees). The sum of values exchanged is zero.

The reason why the stock market exists is that it's not zero-sum utility. Like insurance, some people are willing to lose money in order to hedge out a risk or move risk to different products. Nonetheless, trading is absolutely zero-sum.

You're not barred from purchasing machines that are close to the exchanges. Contact your local exchange liaison and he'd be happy to set it up for you.

Is it an "unfair practice" if it's openly available to anyone who's willing to pay? Is it cheating if the CVS store closer to you gets more business than the Walgreens farther from you?

There are many actual instances where trading firms DO cheat. Educate yourself and you'll have much better arguments. Flash orders, for example. But co-location is not.

I have no idea what kind of conspiracy theories you're talking about. Are you complaining about the rampant speculation and panic in many markets? I don't see how that's related to HFT. I'm not defending speculation, nor am I defending market manipulation.

Most firms do not have enough capital to unilaterally push the market in one way or another. If the market's behaving erratically, it's usually because of the majority of players thinking in a certain way. If the value of the dollar falls, everything will rise in price, especially commodities.

You're confusing flash orders, which is indeed illegal -- they allow firms to get a peek at customer orders before the orders hit public exchanges.

But being fast as a competitive advantage, given that everyone receives the same information -- that's something entirely different. By the same argument you're making, Google should be fined because they have infrastructure that's vastly superior to the average person. If the average person wanted to compete with Google, he or she would need to build too many things.

I'm being a bit facetious, obviously, but you have to distinguish these concepts.

You bring up the valid points I was trying to get at. People should recognize HFT for what it is -- just a technique. A way to do something. Not a strategy. People used to deliver mail with cars. Now people use planes as well. The fundamental value-add is the same; the way in which it's being done is different.

You have strong feelings against the financial industry in general. I understand. Enron screwed over thousands of people with their shady tactics and outright manipulation of their finances. Banks used their position and superior knowledge of the markets to sell unsafe products recklessly and brought down the housing market. Unlawful HFT firms started using flash orders to their advantage, peeking at client flow before the information hit the public exchanges.

At the end of the day, every for-profit business is trying to make money. So don't pretend that we are alone in that respect. The only difference is that as consumers, you don't really understand the value of a few pennies being saved over billions of transactions. We may be saving the US economy, in aggregate, millions and millions. For any one person individually, it will be insignificant.

You have it backwards... shorter hold times = smaller risk. Longer hold times = larger risk. Do a thought experiment with a random walk. For any given period of time, there is a measure of expected move (0) and variance. If you hold positions longer, you're more likely to suffer more swings.

Your confusion arises from the fact that there are two problematic things here: market failures and HFT evils. Yes, HFT evils do exist. Flash orders are evil. They allow HFT firms to take a peek at orders before they hit the public exchanges. They should be eliminated. Step ups in options are not fair for similar reasons. They should be eliminated.

But something like the flash crash on May 6 was largely due to market failures. Someone bet that the US economy was going to collapse -- to the tune of $4.1 billion dollars. Some exchanges, for some reason, started quoting products at 1 cent. These failures contributed to the massive market swing.

Market making HFT is a continuation of... designated market makers back in the day. People would manually be assigned the task to provide liquidity for certain companies. Again, not all HFT is good. I'm sure there's HFT firms preying on unfair data and naive customers. But let's not throw the baby out with the bath water.

E-mail is used for the so-called "Nigerian" scams. Guns are used to murder people. Technological progress doesn't wait. The most annoying thing about this whole debate is how people are unaware of the bigger issues at hand. Monopolies in the currency exchanges forcing spreads that are 5% the price of the product. Consumers unknowingly buying illiquid, unregulated derivatives that banks charge exorbitant fees for, only to have those derivatives blow up and destroy the entire market.

I don't know why you're so opposed to the idea that there are things machines can do better than humans. Perhaps you can enlighten me on where you are coming from? Your arguments seem to belie a deep-seated dislike for everything HFT.

Anyway, being faster is tangentially helpful to consumers, in the sense that we're competing against each other for market flow. Pepsi and Coca-Cola probably worry about producing 12328 bottles per assembly line per day. Who cares if they produce 12328 or 12329? As a consumer, you just want your bottles. In market making, being faster allows us to manage risk better. We stand publicly so that investors can trade against us. Sometimes, someone will put in a massive order (probably some pension fund) and we will all get huge positions that we need to liquidate quickly. The fund gets a cheap price for all its shares, and we have the difficult task of liquidating it as quickly as possible. That's where our speed comes in. It may not benefit consumers directly, but because we can manage risk better, the spreads are thinner, thicker, and pension funds that manage your 401k can get more volume done at once.

I do agree that the arms race is unfortunate. Many in the HFT community wish the arms race to stop. If you think about it, the only people who benefit from this arms race is the arms producers: the companies that dig holes into the Earth to create a network line faster than any existing line. In order to simply stay in business, HFT companies have to fork up some dough for those lines. Trust me, we hate what this arms race has begun.

Also, please try to separate "market failures" and "HFT evils". The flash crash was caused by faulty technology and an irresponsible trader, NOT HFTs. The exchanges were quoting some products at 1 cent... Waddell bet $4.1 billion dollars that the US economy was going to tank... All of these events added to the events. With technology comes trouble. When cars were first introduced, everyone got worried about safety. Do people still die from cars? Yes, it is very unfortunate. But progress is not going to wait.

If you got this far, I commend you for having the patience to read an opposing viewpoint.

Discrete auctions could work. I can't think of any a priori reason why periodic auctions wouldn't work. They might even make the market place more efficient.

However, if you're willing to listen, I'm inclined to disagree.

First, investors get utility out of a continuous market. It's like having a convenience store open continuously from 8:30AM to 4:00PM, not in periodic intervals.

Second, that system still favors super-speed traders. Think about it. People will submit their quotes, but the market won't match them until after a period of time. That means the last entrant has the most advantage. As a result, you'll still want the fastest programs, best connections, the best programmers, etc. Even if you make everything hidden until the match (as in a dark pool) you can still process worldly information and wait till the last microsecond.

Third, that system will widen the spread, the difference between the lowest ask price and the highest bid price. Think about it. Let me stretch out the time so that it makes more sense in an everyday context. Imagine you're doing a lemonade stand business. You buy from suppliers, sell to consumers. If you were forced to only buy and sell once a month, instead of every day, what kind of limitations would you face? You would probably be extremely wary of overstocking, because the oranges might go bad (do they? let's just say they do for now). You could probably get away with charging more per drink because people know it happens so rarely. As a result, the costs of having to deal with the increased risk of holding the unsold oranges for longer are passed to the consumer.

There are dark pools, which you can read about. In such exchanges, all quotes are private from all participants. Only the machines see the quotes and generate matches. Obviously, you can probably back out information by analyzing your own trades, but because a lot of information is hidden, many institutions prefer to do volume on dark pools. However, as much as dark pools solve issues, they are somewhat bad for the market as well, because a lot of trading is done secretly. Average investors like yourself -- or anyone, for that matter -- has no visibility into the quotes -- the price discovery -- that are being generated.

There are different flavors of exchanges, all trying to solve the problem of risk transfer. You're not alone in advocating auctions. But it might not have the intended effect.

Thanks for reading the post, instead of just the first line. The food people are buying to feed their kids is probably cheaper because of HFTs.

Disclaimer: I work at an HFT firm.

The implied accusations are flying out of the page like daggers. I wish you, Slashdot readers, could see the world through my eyes. As techno-savvy as you are, you somehow love to hate on HFT without having any idea what it is. Don't get me wrong -- I really don't care if you hate it. What bothers me is that haters have NO IDEA what HFT is doing and basically project their hatred for finance onto it.

I have to say, this article is pretty level-headed. I was expecting more baseless accusations. Of course, the article throws around the typical "HFT was blamed for the huge drop in the stock market in May 2010..." If you cared to look at the linked WSJ article, you would have read that Waddell's desk had sold 75,000 E-mini contracts at the start of the flash crash. If you cared to look at the CFTC report that officially investigated the flash crash on May 6th, you would have read that CFTC blames the flash crash on some trader who executed a large sell order worth $4.1 billion dollars -- why, isn't that just about 75,000 E-minis?

You would have also read that HFT firms actually mitigated Waddell's mistake. They were there to absorb the thousands of E-minis and so dramatically lessened the initial impact. It's really quite admirable the amount of precision coders needed to invoke in order to create a system that executes so quickly and at scale during such a turbulent period. I was hoping that the discourse here would be more along those lines.

Unfortunately, the amount of volume that Waddell executed was too much risk for the traders to bear, so they started getting out of their positions. In fact, no one could handle a trade of such size. It was as if someone predicted the collapse of the US economy and bet $4.1 billion on it. The ensuing chaos was purely the after-effects of the initial destruction caused by Waddell.

New technologies can be used for bad. I bet there's plenty of bad traders manipulating the markets and using speed as an unfair advantage. We need to police HFT, for sure. But I'm also sure that people are using guns to kill other people out of malice, using cars to traffick illegal drugs, and using airplanes to destroy buildings. HFT is a style of trading. It's a technique, not a strategy. The sooner we realize this, the more progress we will make as a society in implementing policies and regulations.

You guys all hate on HFT, but you are really the ones benefitting from this technology. In market making there's a spread -- the difference between the lowest ask price and the highest bid price. Take a look at the most liquid stocks. They are probably trading at 1 cent wide spreads. Compare that to years ago when spreads used to be dollars. Go to a bank and look at the currency exchange rates. I just did a look into Bank of America's spreads. 100 euros gets you 135.35 dollars. Based on recent trading prices on the public exchanges, 100 euros should be able to fetch closer to 143.62 dollars. BoA is charging a spread that is more that 5% of the value of the product! I don't blame them -- the landscape in the currency markets discourages technological innovation and competition.

This phenomenon isn't true just for currencies. It's true for most products that are not regulated or traded publicly. You, the average investor, are being ripped off dearly investing into these opaque markets. The size of spreads is truly a symbol of capitalism. If there's competition, the spreads are tight. If there's monopoly, the spreads are wide.

You complain about HFT being super fast and "shaving off transactions" as if we somehow have access to your accounts and embezzle money a la Office Space. That's like complaining about WalMart having such efficient systems and internal logistics that your cereal is getting too cheap. Yes, I do believe that some traders use speed unfairly, and yes, WalMart probably did shady things we don't know about, but my point is that not every trader is bad. Technology can be used for good and bad.

Well, where do HFT make their money from? After all, they must be skimming the money from someone, right? Trading is a zero-sum game.

Well, who loses when spreads are thinner? Big banks that offer massive spreads that are 5% the price of the product. Monopolies that seclude flow and prevent faster traders from providing thinner spreads. Industries that rely on their monopolies to keep faster players out of the market so that they can subsist on their outdated, unoptimized pieces of shits they call hardware (**cough** currency exchanges **cough**). If you buy 100 shares of MSFT, you are DIRECTLY benefitting from reduced spreads. If you have any money invested in 401k accounts, you are DIRECTLY benefitting from reduced spreads.

I believe this hype will all die away at some point. It happened with private equity firms, it happened with the internet, it happened with cars. Fear and anger will turn into acceptance, and eventually, we'll move on to the next piece of technology we don't understand.

The article is misleading. Please don't go around saying "AI beats top progamers at Starcraft". For one, the player they mention, Oriol, was not a progamer. The article does not say so either, but articles quoting the article seem to. They say

There seems to be confusion about the name of the player. The player that the UCSC article refers to, =DoGo=, indeed participated in WCG 2001 finals for Spain, but his name was Antonio Crespo Gomez.

Who knows what the context really was? Maybe the developers asked him to try a specific build order in order to see how the computer would respond. Maybe he did legitimately lose one game... out of a hundred, the only reason being he was forced to only use his mouse.

In any case, the biggest complaint I have is that he was a good player back in 2001. That was before the invention of mutalisk micro, the macro-oriented plays led by iloveoov, the micro-oriented strategies pursued by Boxer -- basically, before people figured out how to really play the game. The AI researchers undoubtedly utilized a lot of modern strategies. Also, no matter how good someone used to be, it's hard to be as good ten years down the line, even with crammed practice. I'd bet anyone that no computer in the next couple decades would beat actual progamers of today (by which I mean an A-team member of a progaming team in Korea, in a best-of-five).

Don't take this post as bashing the research -- I think it's amazing what they've been able to do. Just don't compare it to Deep Blue vs. Kasparov, because it's closer to Deep Blue vs. Middle School Chess Team Captain.

My last sentence may have been a cryptic.

What I meant was that a lot of continuous market making is managing fleeting imbalances of supply and demand that do not really reflect the stock's fundamental value. As a result, specialists really are not helped by fundamental analysis. They're just hoping to win cents here and there, and that's their edge.