3 ms·

Isn't "reduces spread sizes" a fancy way of saying that when a big pension fund decides to move a billion dollars from Coke to Pepsi, they pay slightly more to

by mundo 10y ago

Isn't "reduces spread sizes" a fancy way of saying that when a big pension fund decides to move a billion dollars from Coke to Pepsi, they pay slightly more to do so than they would if HFT didn't exist? That's what people mean when they complain about HFT affecting retail investors (as opposed to someone selling 100 shares of something on Etrade).

ikeboy 10y ago
What no, it means they pay less. They sell coke and get slightly more, and buy Pepsi and get a slightly lower price. Instead of say, Coke being at 194.01 bid and 194.02 ask, that might narrow to 194.012 bid and 194.018 ask. If you trade in that market, you're better off. The loser is the company previously making the market, which had been buying at 194.01 and selling at 194.02. There are more complicated ways in which HFTs can indeed be at odds with institutional investors. See e.g. https://www.bloomberg.com/view/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders https://www.bloomberg.com/view/articles/2014-03-31/michael-l... But if they couldn't adjust their price so fast, the spreads would be higher in the first place to account for the risk. Nobody has the right, or should have the right, to sell a billion dollars in any market without moving the market before it's over. Why should someone take the other side of that trade, knowing the price will crash as soon as it's over?
- mundo 10y ago
  All of these details sound plausible, but as whole this (the assertion that the profit made by HFT comes primarily at the expense of other market makers) smells wrong. If that assertion were true, it would seem to imply that market-making is less profitable today than in the past. Is that the case? I was under the impression that it was more profitable.
  - ikeboy 10y ago
    Virtu is a huge market maker. They are/were 3-5% of all equity trades in the US [0]. They make $200 million a year in profit [1]. [0] https://online.wsj.com/public/resources/documents/VirtuOverview.pdf https://online.wsj.com/public/resources/documents/VirtuOverv... [1] https://en.wikipedia.org/wiki/Virtu_Financial https://en.wikipedia.org/wiki/Virtu_Financial

by mundo 10y ago

ikeboy 10y ago

What no, it means they pay less. They sell coke and get slightly more, and buy Pepsi and get a slightly lower price. Instead of say, Coke being at 194.01 bid and 194.02 ask, that might narrow to 194.012 bid and 194.018 ask. If you trade in that market, you're better off. The loser is the company previously making the market, which had been buying at 194.01 and selling at 194.02. There are more complicated ways in which HFTs can indeed be at odds with institutional investors. See e.g. https://www.bloomberg.com/view/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders https://www.bloomberg.com/view/articles/2014-03-31/michael-l... But if they couldn't adjust their price so fast, the spreads would be higher in the first place to account for the risk. Nobody has the right, or should have the right, to sell a billion dollars in any market without moving the market before it's over. Why should someone take the other side of that trade, knowing the price will crash as soon as it's over?

mundo 10y ago
All of these details sound plausible, but as whole this (the assertion that the profit made by HFT comes primarily at the expense of other market makers) smells wrong. If that assertion were true, it would seem to imply that market-making is less profitable today than in the past. Is that the case? I was under the impression that it was more profitable.
- ikeboy 10y ago
  Virtu is a huge market maker. They are/were 3-5% of all equity trades in the US [0]. They make $200 million a year in profit [1]. [0] https://online.wsj.com/public/resources/documents/VirtuOverview.pdf https://online.wsj.com/public/resources/documents/VirtuOverv... [1] https://en.wikipedia.org/wiki/Virtu_Financial https://en.wikipedia.org/wiki/Virtu_Financial