5 ms·
> they never seem to answer the question of why someone who is not an HFT firm would want to trade on an exchange that caters to high frequency traders. There
by ctlby 11y ago
> they never seem to answer the question of why someone who is not an HFT firm would want to trade on an exchange that caters to high frequency traders.
There are network effects in trading: people go to transact where everyone else is transacting. Because HFT is allowed on the most popular venues, the economic thing to do is hold your nose and trade there too. This is true even if HFT somehow makes the venues "worse" (which it doesn't).
- CyberDildonics 11y agoIf HFT doesn't make those venues worse, then how are they making money?
- kasey_junk 11y agoThey get paid to bridge demand over time. By efficiently doing this they can make the venues better in aggregate and still make money.
- CyberDildonics 11y agoDoes the demand between millionths of a second need to be bridged?
- kasey_junk 11y agoNo, but by being able to react fast they can price what the service of bridging more efficiently, and thus more cheaply to those taking part in the service.
- CyberDildonics 11y agoHow is that not circular logic?
- kasey_junk 11y agoMarket Makers sell the service of taking on the risk of bridging prices for a good over time. The price for that service is directly correlated with the amount of risk they take on. HFT reduce the risk of the inventory they hold by being able to adjust the prices of that inventory fast. HFT Market Makers can therefore price the service cheaper as their risk is less, due to the speed.
- tptacek 11y agoNo, there is probably nothing especially productive about pricing things at that level of granularity. But speed is a reasonable figure of merit that allows different algorithmic trading firms to compete for the business of making markets, rather than having all of market-making owned by one of the big investment banks.
- ctlby 11y agoMakers collect the spread from participants who want to transact right now (the price of immediacy). "Real" investors are better off because they paid someone to take a position of their hands that they didn't want. They made their trading problem someone else's. Takers exploit the option value of resting orders by trading when "fair value" moves but those orders don't. "Real" investors are better off because they cheaply acquired a security they may hold for years (the fact that the price will shortly move against them by a penny or two is irrelevant). Market makers are worse off--but they're HFT guys, and it's not really your problem.
- CyberDildonics 11y agoDo "real" traders want microsecond immediacy? I would think a person would rather have a better price, even if it means waiting a whole second.
- kasey_junk 11y agoIf they didn't, they aren't required to pay for it. If they want to wait they can. Better yet, if they want the exchange to wait for them until the price gets to be what they want, they can do that as well, without paying for any immediacy at all.
- andylei 11y agowhen there was no HFT and market makers were humans, you had to wait a long time for your trades AND spreads were huge (aka, prices were worse).
- CyberDildonics 11y agoYou are making an assumption that computers mean high frequency trading. We can use computers to trade without having high frequency traders.
- ctlby 11y agoObviously not. Humans just want something that feels like "now." That this has changed from seconds to milliseconds to microseconds is an inevitable consequence of the rules of the game--and is completely irrelevant to you. Your horizon is much, much longer than that of the professional trader to whom these details matter.
- tptacek 11y agoThe same way market makers have made money since prices were literally printed on a stream of tape: by outcompeting other market makers to capture spreads.