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Sure: basically when large institutional investors go to sell shares they sell them in blocks. There are not a ton of people who can afford to buy these entire
by wdewind 11y ago
Sure: basically when large institutional investors go to sell shares they sell them in blocks. There are not a ton of people who can afford to buy these entire blocks, though they may want to buy some portion of them. HFTs add value by buying these large blocks, and then breaking them up and selling them in smaller chunks. This is called "market making." This added liquidity makes it far easier for both the institutional investor to sell their shares as well as for the final buyer to purchase them. So the value they provide is increased liquidity to the market.
Edit: Whoops, I'm incorrect. This is a description of market making in general, but not how HFTs do it (which have a variety of strategies). But the general premise is that the value provided is still increased liquidity. That being said, not all HFTs employ a market making strategy.
- beagle3 11y agoThose who do the block trades are not generally HFTs
- wdewind 11y agoPlease correct me, happy to learn.
- oojgaoj 11y agoThis isn't what HFTs do. One common HFT trick is exactly the opposite of what you wrote: they'll attempt to identify probable sellers of large blocks who are disguising their actions by using smaller blocks (they can identify this by measuring latency orders arrive at different exchanges), and then using knowledge of the order books at different exchanges to buy the large block at 10.00 from the seller who was already committed to sell and then sell it at 10.02 to the buyer who was already committed to buying. They can do this because the institutional seller is using the NBBO based on the SIP, and they're watching 200micros ahead using direct feeds.
- wdewind 11y agoPlease correct me, happy to learn. Edit: Ah you added an explanation, thanks.