--- title: "[TradFi Tales Ep 2] ๐Ÿ’ฑ High-Frequency Trading (HFT) - The War Between Man and Machine That Extracts ๐Ÿ’ต billions from The Market - Thread Time ๐Ÿงต- #TradFiTales #CardamoCommunity #" canonical_url: "https://typefully.com/t/icy0HOR" markdown_url: "https://typefully.com/t/icy0HOR.md" agent_guide_url: "https://typefully.com/ai-agents.md" post_delimiter: "***" robots: noindex source: typefully_shared_draft share_id: "icy0HOR" --- [TradFi Tales Ep 2] ๐Ÿ’ฑ High-Frequency Trading (HFT) - The War Between Man and Machine That Extracts ๐Ÿ’ต billions from The Market - Thread Time ๐Ÿงต- #TradFiTales #CardamoCommunity #TradFi #DeFi ![fa6a86f5-449e-44d7-86bb-5d926302d55c.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/e4fcdf3f-7b2c-4223-a8d8-70daa8908d39.png) *** 1/ Intro High-Frequency Traders (HF-Traders) use custom-built machines to front-run the market, buying or selling assets before you can - then selling you the same assets for a profit. They are the unnecessary middle-man charging a hidden tax in TradFi markets. *** 2/ How Does It Work? HFT uses algorithms to automate trades based on market data. Their state-of-the-art equipment can execute a trade in 64 microseconds (64 millionths of a second). That's 1000s of trades in the time it takes a human trader to blink - a significant advantage. *** 3 /Speed (Latency) HFT is so fast that orders can execute before a gap in price from one market to another closes, even if it exists for < second. Or if another trader enters an order in one market (revealing their intention) HFT is fast enough to beat them to other markets. ![image.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/37b11c50-be27-423c-a1f4-cc56cdef0df6.png) *** 4/ Pay for Speed HFT firms spend millions to reduce latency. It's all optimized, even the length and direction of cables! Spread famously built a secret underground cable from New York to Chicago for $300 mil just to cut transfer speed by 3 milliseconds. https://en.wikipedia.org/wiki/Spread_Networks#History *** 5/ Data or Nothing Speed is only as useful as the data available to feed the algorithms. Without the right data, the algorithms don't know what to buy or sell. This creates a lot of incentive to get the right data (or sell the right data) at any cost. *** 6/ Getting Data First For HFT firms it's not enough to get the data, they need to get it and act on it before anyone else. @reuters famously got caught selling access to the consumer confidence number to HFT firms minutes before public release. https://www.cnbc.com/id/100809395 *** 7/ Dark Pools This could be its own #TradFiTales topic - exchanges owned by banks and hidden from the public Dark Pools exist in theory to limit the impact of big orders on the market. HF-Traders pay for access to this non-public information using it to front-run everybody else ![image.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/689ff210-499c-4602-8f5c-deb16d4adb9a.png) *** 8/ Rebates Rebates are incentives typically paid to a seller by an exchange to encourage liquidity. HF-Traders convinced some exchanges to pay buyers instead. This encourages traders to use these exchanges first giving HF-Traders the tip of which assets to buy on other markets ![image.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/fc977af5-1b61-479b-83e3-e360c25e7568.png) *** 9/ Regulation In the US, all brokers are required to buy stocks at the lowest market price - this is supposed to make markets fairer! But when liquidity is exhausted on cheaper exchanges, HF-Traders use their speed to buy up other markets, raising the cost for everyone else. *** 10/ Pinging If you want to know if people want to buy or sell you may need to do a little trading yourself. HF-Traders send small orders to exchanges. If they're filled instantly they infer bigger orders are coming & use their speed to get to the other markets first. ![image.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/9a8c5917-a0a4-4902-b18d-f7d746633f4d.png) *** 11/ Payment for Order Flow Even apps built to 'democratize' access to markets, march traders into the HFT machines See how @RobinhoodApp send their customer's orders to companies like Citadel who front-run the retail investors using the app with HFT https://fortune.com/2020/07/08/robinhood-makes-millions-selling-your-stock-trades-is-that-so-wrong/ *** 12 Quantity Over Quality HFT impact is subtle on single orders, taking as little as 0.0005USD per-share profit. Multiplied by the millions of trades HF-Traders can execute in a day the impact can be massive. In 2009, 9 billion USD was extracted from the US stock market by HFT. *** 13/ Hidden Tax Poorly thought out regulation and lack of transparency enable HFT to skim money from transactions that likely would have happened anyway Some argue HFT helps to provide liquidity to markets, but the reality is the average trader's trades cost more because of HFT *** 14/ HFT Not a Bad Thing? HFT is a technology that allows automated trading at inhuman speeds, it's not inherently a bad thing. But the information advantage HFT firms pay so much for in TradFi means that regular investors are being taken advantage of - that's what needs to stop. ![image.png](https://d3e0luujhwn38u.cloudfront.net/original/img/original/45335/199e7579-dd8e-4ad0-b05f-1376b8bf38f9.png) *** 15/ DeFi? HFT will always have a speed advantage over their human counterparts. But decentralization ensures fair and equal access to information along with transparent markets. DeFi goes a long way to evening the playing field, ensuring man and machine can co-exist. *** 15/ learn more about HFT This thread was inspired by Flash Boys a book by Michael Lewis. If you'd like to delve further into the realm of HFT it's a great resource and account of the HFT boom in the early 2000s. https://en.wikipedia.org/wiki/Flash_Boys *** [Disclaimer & Submission] This is part of our TradFi Tales series - made up of anonymous stories from the TradFi industry. These anecdotes are meant as entertainment only. If you have your own story to share, please send it to us. Past stories: https://blog.maladex.com/tradfi-tales-compilation-3a0533b53d4cZ