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Faster trading allows market makers to operate with smaller capital investments. This lowers the barrier to entry in the market making business, creating more

Faster trading allows market makers to operate with smaller capital investments. This lowers the barrier to entry in the market making business, creating more competition. More competition reduces the costs of trading. (And not just in theory. Market making used to be exclusively the domain of a few big players. It's not anymore.) Reduced cost of trading matters to almost everyone who's involved in the markets. Passive index funds, for example, have to trade to reinvest profits and to rebalance their composition. That's why Vanguard -- the most evangelical of the passive fund managers -- firmly defends HFT. You may ask, well, why do we need market makers at all? Well, you don't have to use them. You have other options for trading. Call up your broker and ask. What you'll discover is that these other options have far larger transaction costs. A lot of the complaints about HFT I've seen on Hacker News seem to think that no one should get paid for market making. I don't think that's possible. (And if it is, I'd love to know how.) Transaction costs are an inescapable part of trading; ultimately, you're faced with the choice between tilting your hand to other traders or paying some intermediary to take on risk for you. Generally, it costs less to choose the second option.

x0054 11y ago
How does HFT help market making? Would a market that operates with a 1 second resolution be inherently unable to provide the same levels of liquidity that we enjoy today? You argument is that Vanguard is a market maker, Vanguard likes HFT, thus HFT must be good. That doesn't really follow at all. Vanguard could be arguing in favor of HFT for all kinds of reasons, one of them could be that they have the money to rent server space right next to the main exchanges, and pay for the ludicrously low latency connections to the exchanges, so they benefit from HFT by being able to be quicker than others, and they don't want to loose there edge.
- auntienomen 11y ago
  Ummm... No. That's not remotely what I said. Vanguard is not a market maker, and definitely not a HFT shop. Vanguard is the world's largest mutual fund company. If you're not clear on who the major market players are, you should probably stop worrying about the arcane details of which middlemen these players use to interact.
- mrchicity 11y ago
  No. Vanguard is a large participant in the markets because it manages funds for long-term investors. Markets have bid and offer prices where you can instantaneously sell or buy shares, and these bids and offers are often provided by professional market-makers. Before automation, these were humans on an exchange floor. They could only trade a single stock at a time, hence the name "specialist", since they specialized in that issue. Volumes were also lower. To make enough to earn a living, that human on the exchange floor had to charge a big spread between buy and sell prices. For a long-term investor, this spread is an additional friction cost that drags on their returns when rebalancing portfolios. Now a small team of researchers can make markets on many securities at once. They don't have to make as much money on each, so the spreads get smaller. Additionally, instead of a monopolistic specialist, these professional traders compete to win transactions by making better prices (higher bids and lower offers) than others. Many market makers try to keep a neutral "book" of positions, so if they sell some GS they may bid higher in other bank stocks to reduce their exposure to market risk. The faster a market maker can update his quotes or hedge when conditions change, the less spread he needs to charge. http://meanderful.blogspot.com.au/2013/01/hfts-dirty-little-secret-where-money.html http://meanderful.blogspot.com.au/2013/01/hfts-dirty-little-...
- tptacek 11y ago
  Vanguard is like the opposite of a market maker; they're a mutual fund manager. They're the people HFT is ostensibly supposed to be screwing. See, again, per the article, Chesterton's Fence.

x0054 11y ago

How does HFT help market making? Would a market that operates with a 1 second resolution be inherently unable to provide the same levels of liquidity that we enjoy today? You argument is that Vanguard is a market maker, Vanguard likes HFT, thus HFT must be good. That doesn't really follow at all. Vanguard could be arguing in favor of HFT for all kinds of reasons, one of them could be that they have the money to rent server space right next to the main exchanges, and pay for the ludicrously low latency connections to the exchanges, so they benefit from HFT by being able to be quicker than others, and they don't want to loose there edge.

auntienomen 11y ago
Ummm... No. That's not remotely what I said. Vanguard is not a market maker, and definitely not a HFT shop. Vanguard is the world's largest mutual fund company. If you're not clear on who the major market players are, you should probably stop worrying about the arcane details of which middlemen these players use to interact.
mrchicity 11y ago
No. Vanguard is a large participant in the markets because it manages funds for long-term investors. Markets have bid and offer prices where you can instantaneously sell or buy shares, and these bids and offers are often provided by professional market-makers. Before automation, these were humans on an exchange floor. They could only trade a single stock at a time, hence the name "specialist", since they specialized in that issue. Volumes were also lower. To make enough to earn a living, that human on the exchange floor had to charge a big spread between buy and sell prices. For a long-term investor, this spread is an additional friction cost that drags on their returns when rebalancing portfolios. Now a small team of researchers can make markets on many securities at once. They don't have to make as much money on each, so the spreads get smaller. Additionally, instead of a monopolistic specialist, these professional traders compete to win transactions by making better prices (higher bids and lower offers) than others. Many market makers try to keep a neutral "book" of positions, so if they sell some GS they may bid higher in other bank stocks to reduce their exposure to market risk. The faster a market maker can update his quotes or hedge when conditions change, the less spread he needs to charge. http://meanderful.blogspot.com.au/2013/01/hfts-dirty-little-secret-where-money.html http://meanderful.blogspot.com.au/2013/01/hfts-dirty-little-...
tptacek 11y ago
Vanguard is like the opposite of a market maker; they're a mutual fund manager. They're the people HFT is ostensibly supposed to be screwing. See, again, per the article, Chesterton's Fence.