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It's a bit naive to equate the two. Plenty of strategies can be found that leverages high transaction speed and volume that aren't market making. What defines

It's a bit naive to equate the two. Plenty of strategies can be found that leverages high transaction speed and volume that aren't market making. What defines market making is the fact that you buy and sell the same commodity at the same time, taking advantage of the spread to make money. Two other rapid transaction arbitrage strategies involve market manipulation, in which trades are placed that are designed to fool other trading algorithms into believing that the price is going to move a certain way, and statistical arbitrage, which searches for temporary price differentials across exchanges. Neither of these two strategies create liquidity on the market, that is, offers more opportunities for anyone who wants to buy or sell to do so. Instead they seek to create, and/or exploit opportunities.

cryptonector 9y ago
ISTM that high frequency offers/bids that are not meant to complete will tend to become noise that the market filters. That's my sense, though admittedly I don't know enough and have no data to back that up. And when such offers/bids do complete, they really are market making. Either way, this is helping the market discover the price -- you call label this with "exploit", but it's not clear that that's anything but bias. Normal market making too could be seen as exploitation. Suppose the market is crashing. Without market makers the market ceases to function and uncertainty worsens. With market makers the market functions and crashes as much as it wants to. So your stock holdings lose value and here's a market maker glad to help that happen. How is that not "exploitation"? Politics is a war of words, I get that. I guess I should be happy that nowadays we don't punish market makers.
dsacco 9y ago
> What defines market making is the fact that you buy and sell the same commodity at the same time, taking advantage of the spread to make money. You need not be a formal market maker to increase liquidity. Technically speaking even retail customers will receive small transaction fees for increasing liquidity in certain circumstances where it's particularly lacking. More generally speaking, any strategy that rapidly connects two parties is market making, even if the two parties are not immediately next two each other in the strategy's trading queue. > Two other rapid transaction arbitrage strategies involve market manipulation, in which trades are placed that are designed to fool other trading algorithms into believing that the price is going to move a certain way Market manipulation is not a good term to use for this, and it's a fairly serious accusation to levy against a trader. Market manipulation is an illegal activity that typically involves cornering or collusion. More abstractly, this is a net improvement in price discovery, because one party notices that another party can be fooled (which means their algorithm has a glaring pricing inefficiency). In repeatedly taking money from the other party, the other party becomes incentivized to stop executing that strategy. Once there is no counterparty to take that trade anymore, the inefficiency has been traded away, and the market is now (likely imperceptibly) more efficient. > Neither of these two strategies create liquidity on the market, that is, offers more opportunities for anyone who wants to buy or sell to do so. Instead they seek to create, and/or exploit opportunities. This creates liquidity. Any situation that increases trading activity increases liquidity by definition. You do not need purely symmetric market making to improve overall liquidity - if many low latency trades are being executed, and they are finding counterparties, the liquidity of that market is increasing as a result of the volume. HFTs do not buy and hold, which means they are rapidly connecting buyers and sellers, even if it individual securities are bought and sold asynchronously.
- cryptonector 9y ago
  This is a very good answer. I suspect too that HFTs do not buy and hold simply because the cost of holding must be very high for an HFT, e.g., transaction fees may be higher when you mean to hold, and anyways, whatever you're holding is burning a hole in your pocket, much like cash does for an investor -- it represents a missed opportunity. I also don't see how offers/bids that no one wants to take exploit anything. If they are unreasonable then they are noise that a) can be filtered, b) costs the HFT something. If they are reasonable then they may end up in an actual trade (improving liquidity). Either way they help price discovery!

cryptonector 9y ago

ISTM that high frequency offers/bids that are not meant to complete will tend to become noise that the market filters. That's my sense, though admittedly I don't know enough and have no data to back that up. And when such offers/bids do complete, they really are market making. Either way, this is helping the market discover the price -- you call label this with "exploit", but it's not clear that that's anything but bias. Normal market making too could be seen as exploitation. Suppose the market is crashing. Without market makers the market ceases to function and uncertainty worsens. With market makers the market functions and crashes as much as it wants to. So your stock holdings lose value and here's a market maker glad to help that happen. How is that not "exploitation"? Politics is a war of words, I get that. I guess I should be happy that nowadays we don't punish market makers.

dsacco 9y ago

> What defines market making is the fact that you buy and sell the same commodity at the same time, taking advantage of the spread to make money. You need not be a formal market maker to increase liquidity. Technically speaking even retail customers will receive small transaction fees for increasing liquidity in certain circumstances where it's particularly lacking. More generally speaking, any strategy that rapidly connects two parties is market making, even if the two parties are not immediately next two each other in the strategy's trading queue. > Two other rapid transaction arbitrage strategies involve market manipulation, in which trades are placed that are designed to fool other trading algorithms into believing that the price is going to move a certain way Market manipulation is not a good term to use for this, and it's a fairly serious accusation to levy against a trader. Market manipulation is an illegal activity that typically involves cornering or collusion. More abstractly, this is a net improvement in price discovery, because one party notices that another party can be fooled (which means their algorithm has a glaring pricing inefficiency). In repeatedly taking money from the other party, the other party becomes incentivized to stop executing that strategy. Once there is no counterparty to take that trade anymore, the inefficiency has been traded away, and the market is now (likely imperceptibly) more efficient. > Neither of these two strategies create liquidity on the market, that is, offers more opportunities for anyone who wants to buy or sell to do so. Instead they seek to create, and/or exploit opportunities. This creates liquidity. Any situation that increases trading activity increases liquidity by definition. You do not need purely symmetric market making to improve overall liquidity - if many low latency trades are being executed, and they are finding counterparties, the liquidity of that market is increasing as a result of the volume. HFTs do not buy and hold, which means they are rapidly connecting buyers and sellers, even if it individual securities are bought and sold asynchronously.

cryptonector 9y ago
This is a very good answer. I suspect too that HFTs do not buy and hold simply because the cost of holding must be very high for an HFT, e.g., transaction fees may be higher when you mean to hold, and anyways, whatever you're holding is burning a hole in your pocket, much like cash does for an investor -- it represents a missed opportunity. I also don't see how offers/bids that no one wants to take exploit anything. If they are unreasonable then they are noise that a) can be filtered, b) costs the HFT something. If they are reasonable then they may end up in an actual trade (improving liquidity). Either way they help price discovery!