6 ms·

How does that provide value? I have no personal experience in this, but I've heard that the order book is now very "shallow" due to HFT, such that it's hard to

by ced 11y ago

How does that provide value? I have no personal experience in this, but I've heard that the order book is now very "shallow" due to HFT, such that it's hard to sell/buy a meaningful quantity of stocks at the market price. Does that make sense?

harryh 11y ago
The bid ask spread is a measure of how far behind you are the moment you buy a stock. If the ask is $10 but the bid is $9.75 you've lost 0.25 per share the second you make a trade. If the spread is only $0.01 (as is now common) you've only lost a penny. So smaller spreads are great. It's true that markets now respond faster to large sales so if you're a hedge fund trying to unload $BIGNUM shares of MSFT you'll have a harder time. But that's good for everyone else. If that hedge fund has proprietary information that MSFT is undervalued you want that information getting out to the market as fast as possible leading to more efficient prices.
- ced 11y ago
  The bid ask spread is a measure of how far behind you are the moment you buy a stock. If the ask is $10 but the bid is $9.75 you've lost 0.25 per share the second you make a trade. That makes some sense, but who have you lost it to? I was thinking about it the other day, and it seems that the "liquidity is good" argument can make some sense if people are not willing to make a transaction immediately. If I want to sell a bag of apple for 1$ _right now_, and someone else is willing to buy that bag for up to 1.50$ in a week, then I can appreciate that there's a middleman (providing liquidity) willing to hold the bag for me during that time and that he makes some profit from the spread. However, if the buyer and seller are both willing to make the trade at roughly the same time, then it's much better if they do it themselves (splitting the 50 cents of value amongst themselves) than if a middleman gets into the picture. More or less the argument made here: http://smbc-comics.com/index.php?id=3890 http://smbc-comics.com/index.php?id=3890
  - harryh 11y ago
    You've lost it to a market making who is charing you for providing a service. Whenever you trade with a market maker you are buying liquidity (which used to be expensive but is now a lot cheaper). You're saying "I want to take the price you are offering right now and am not willing to take the risk that someone else will never come along to trade with me at a slightly better price." If you don't want to trade with a market maker you can avoid purchasing their liquidity by placing a limit order that doesn't cross the spread. You'll then wait until someone else comes along to trade with you. Of course, you're taking a risk that the stock price will move away from you and you'll never trade. Normally this is the risk the market maker takes for you (which is why you pay him) but you can always do it yourself if you want. In that comic the first caveman is getting a price that is right in front of him. He's not willing to wander around hoping to find a better price in another cave. That's a service that the 2nd caveman is performing for him. That's why the 2nd caveman gets paid. The key thing to realize is that market makers don't just "get into the picture" by muscling their way in when other people don't want them there. Think of them off to the side selling liquidity for anyone who wants to walk up to them and buy it.
    - mrchicity 11y ago
      And you haven't really "lost" anything since you never had the ability to trade at the theoretical future fair price to begin with--nobody does. As you mention, your best alternative is to work non-marketable limit orders. This, too, has a real price: adverse selection, risk of missing your fill, connectivity costs, time spent monitoring multiple markets and updating your order. If you're a large investment bank or fund, your cost to do this may be lower than crossing the spread. For the average investor, no way.
      - harryh 11y ago
        Indeed, I agree that "lost" isn't the best word choice here. Instead "spent" would be better. You've spent money paying for a service provided by the market maker. And due to the wonders of automation, the cost of that service has been drastically reduced.
    - 11y ago
harmegido 11y ago
I don't buy that the order books are shallower than previously. I'd love to see evidence of it. People also complain that 'as soon as the markets move, the HFT firms get out of the way and the liquidity disappears.' As if the humans in the pits were making markets during big moves and getting run over (losing money) during high volatility. Give me a break.

by ced 11y ago

harryh 11y ago

The bid ask spread is a measure of how far behind you are the moment you buy a stock. If the ask is $10 but the bid is $9.75 you've lost 0.25 per share the second you make a trade. If the spread is only $0.01 (as is now common) you've only lost a penny. So smaller spreads are great. It's true that markets now respond faster to large sales so if you're a hedge fund trying to unload $BIGNUM shares of MSFT you'll have a harder time. But that's good for everyone else. If that hedge fund has proprietary information that MSFT is undervalued you want that information getting out to the market as fast as possible leading to more efficient prices.

ced 11y ago
The bid ask spread is a measure of how far behind you are the moment you buy a stock. If the ask is $10 but the bid is $9.75 you've lost 0.25 per share the second you make a trade. That makes some sense, but who have you lost it to? I was thinking about it the other day, and it seems that the "liquidity is good" argument can make some sense if people are not willing to make a transaction immediately. If I want to sell a bag of apple for 1$ _right now_, and someone else is willing to buy that bag for up to 1.50$ in a week, then I can appreciate that there's a middleman (providing liquidity) willing to hold the bag for me during that time and that he makes some profit from the spread. However, if the buyer and seller are both willing to make the trade at roughly the same time, then it's much better if they do it themselves (splitting the 50 cents of value amongst themselves) than if a middleman gets into the picture. More or less the argument made here: http://smbc-comics.com/index.php?id=3890 http://smbc-comics.com/index.php?id=3890
- harryh 11y ago
  You've lost it to a market making who is charing you for providing a service. Whenever you trade with a market maker you are buying liquidity (which used to be expensive but is now a lot cheaper). You're saying "I want to take the price you are offering right now and am not willing to take the risk that someone else will never come along to trade with me at a slightly better price." If you don't want to trade with a market maker you can avoid purchasing their liquidity by placing a limit order that doesn't cross the spread. You'll then wait until someone else comes along to trade with you. Of course, you're taking a risk that the stock price will move away from you and you'll never trade. Normally this is the risk the market maker takes for you (which is why you pay him) but you can always do it yourself if you want. In that comic the first caveman is getting a price that is right in front of him. He's not willing to wander around hoping to find a better price in another cave. That's a service that the 2nd caveman is performing for him. That's why the 2nd caveman gets paid. The key thing to realize is that market makers don't just "get into the picture" by muscling their way in when other people don't want them there. Think of them off to the side selling liquidity for anyone who wants to walk up to them and buy it.
  - mrchicity 11y ago
    And you haven't really "lost" anything since you never had the ability to trade at the theoretical future fair price to begin with--nobody does. As you mention, your best alternative is to work non-marketable limit orders. This, too, has a real price: adverse selection, risk of missing your fill, connectivity costs, time spent monitoring multiple markets and updating your order. If you're a large investment bank or fund, your cost to do this may be lower than crossing the spread. For the average investor, no way.
    - harryh 11y ago
      Indeed, I agree that "lost" isn't the best word choice here. Instead "spent" would be better. You've spent money paying for a service provided by the market maker. And due to the wonders of automation, the cost of that service has been drastically reduced.
  - 11y ago

harmegido 11y ago

I don't buy that the order books are shallower than previously. I'd love to see evidence of it. People also complain that 'as soon as the markets move, the HFT firms get out of the way and the liquidity disappears.' As if the humans in the pits were making markets during big moves and getting run over (losing money) during high volatility. Give me a break.