You can say that about any industry that turns a profit. Those philanthropic $MEMBERS_OF_MONEY_MAKING_INDUSTRY just wanted to make $THING_INDUSTRY_DOES better for everyone? Sure they did. Sure they did.

Making money is not a character flaw. Otherwise, many prominent members of this board would be horrible people.

Your caveat doesn't apply if they aren't helping markets be more efficient. HFT is basically a latency arms race ripoff scam. Whoever pays more for faster lines and closer access to the datacenter takes the cake. Thousands of PHDs are working on this instead of real stuff.

Say this is the makeup of market participants: all of them are normal merchants buying fruit for their shops but 2 are latency arbitragers. Shipments of fruit don't always come in because sometimes the sail boat crashes into something.

The latency arbitragers hire high speed skiffs to go scout for the ship before it arrives. If one of them sees that a shipment of oranges are missing, he rushs back to game the unsuspecting others in the market: orange prices are going to go up so he buys them on the cheap.

Because nothing gets better with two competing arbitragers. They simply compete with each other on hiring out more skiffs and paying for elaborate faster ones. Or signaling by latern along a chain of ships.

None of this helps the market; all other participants lose out. With competition between the two arbitragers they end up wasting most of the money buying faster ships. Ships that could be used for.. rescuing crashed orange ships? Many other things as well. The worst government bureaucracy couldn't be more wasteful.

Markets aren't efficient even in theory if there is an information asymmetry.

I hope you can see the analogy between my example and things like:

* deploying more and more servers to literally turn our energy into waste heat (they could be simulating protein fold or something)

* paying trading exchanges extra for in-house servers (this is just a complete scam)

* Digging hundreds of miles of new fiber line to save 2ms of latency over the existing line (with no plausible consumer benefit because the old lines had plenty of dark fiber and the new line is monopolized by whomever pays the most)

* Setting up microwave (lantern?) relay towers to get from New York to Chicago a millisecond faster

* Making markets more likely to have a major crash by forcing developers to use C++ to eek out a couple milliseconds over safer alternatives

You can make a little bit better case for electronic market making.

You are conflating market making and latency arb, which are not the same thing. All of your points apply to latency arbitrage and you haven't said anything about market making.

As long as there are profitable arbitrage opportunities, people are going to go after them. The profits from latency arb aren't infinite and things will hit an equilibrium when the profits line up with the costs. Incidentally, I don't think latency arb is a bad thing. The arbitrageurs keep prices in line between exchanges, so you don't have to worry as much about getting a crappy price at one exchange when a better price was available at another exchange.

No I'm not, I clearly said "You can make a little bit better case for electronic market making." But if you think market making has no major latency component, you are living in the 70's.

Larry Harris, who you recommend, is advocating periodic clearing auctions (non-continuous trading).

>> * Making markets more likely to have a major crash by forcing developers to use C++ to eek out a couple milliseconds over safer alternatives

Errr... what? Trading logic is trading logic regardless.

Maybe making the programs more prone to crashing (if badly written), but making markets prone to crash?

Look at what happened to knight, it could have spilled out to the whole market and they would have had to roll back trades or something (I'm not blaming knight's thing on C++).

That's my point though! Rolling out the wrong systems, bad algorithms etc etc could happen with any language.

If there was a memory corruption, or a security error or something, I could see it being attributable (in part) to the language. The knight thing seems more of a human cock-up.

Let me make it more specific: it is soft-realtime C++. It is way more error prone and on top takes way longer to wright code with same behavior as regular C++ (ignoring latency), no to mention it takes much longer to develop.

I think they mean "more efficient" like the cotton gin made the cotton industry more efficient. By reducing the labor involved in processing cotton, the companies that used cotton gins could eek more profit from every acre of production.

HFT doesn't "wring the waste" of inefficiency back into the market, but into the hands of the HF trader. HFT does benefit normal market traders, but I'm not sure to what extent.

What they're actually saying is that there's now too many high-frequency traders competing for there to be much profit left in this money scraping business.