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>Please help me, what real value does an investment like this yield for the economy as a whole? The argument usually goes like this: HFT firms provide liquidit

>Please help me, what real value does an investment like this yield for the economy as a whole? The argument usually goes like this: HFT firms provide liquidity for the market; they are usually the people on the other side of the trade when a retail investor buys stock/bonds/etc. So without the HFT firms, you wouldn't be able to trade at a good/fair price according to market conditions. Furthermore, if you buy stock from NASDAQ or NYSE or London stock exchange, you should get the same price. This idea that you should pay the same price for an asset regardless of where you buy it is enforced by HFT firms, as outlined in the article. Clearly, HFT firms need to get paid for this service, so retail investors typically pay the bid/ask spread.

MereInterest 6y ago
Isn't the liquidity only worthwhile at times of low liquidity? The ability to quickly exchange shares only matters at times when you want to exchange shares quickly. The only time when you care about exchanging shares quickly is if the price is changing quickly. Those are exactly the times when HFT is the riskiest, and the most likely to be shut off to avoid losses. (For example, shutting off HFT as a response to the 2010 flash crash[0].) I get the argument, but it feels like the societal benefit is taken away whenever it is needed, and paid for only when it isn't needed. [0] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
- lucaspauker 6y ago
  Good point. Here is an in-depth analysis from the NY Fed: https://libertystreeteconomics.newyorkfed.org/2015/08/liquidity-during-flash-events.html https://libertystreeteconomics.newyorkfed.org/2015/08/liquid...
- derriz 6y ago
  I don't think I get your point. Correct me if I'm wrong but it seems to be that you're suggesting that if I want to sell some of my shares, for example, that I should wait until volatility is low? If I had a way of knowing when the market would have low volatility, I'd throw away the shares and become a billionaire trading options. Saying you should wait for low volatility before trading is equivalent to saying you should wait until the price is high before selling. Both statements seem to reflect common sense but neither piece of advice can be translated into an actual strategy. The impact of HFT market making isn't that difficult to observe - all markets which have attracted such participants have seen huge falls in spreads. The spread is a tax on everyone who buys and sells in the market so lower spreads are good for everyone. (For example the cost of buying and selling a DAX future before fees was about 70 euro just 15 years ago while the spread is now typically less than a euro.)
- thedufer 6y ago
  > Isn't the liquidity only worthwhile at times of low liquidity? No, because liquidity is also about tighter spreads. Since the spread is effectively a transaction fee paid to buy or sell on exchanges, shrinking it is beneficial to most market participants.
deanCommie 6y ago
Honest naive question - Just because HFT firms provide liquidity does that mean it is the ONLY way such liquidity could be provided?
- lucaspauker 6y ago
  Market makers provide liquidity as a service. HFT firms are market makers: https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
  - buck4roo 6y ago
    Long before HFT firms, we had Market Makers -- they were often a separate department of the brokerage firm you were already using. Therefore, Markets don't need HFT firms to provide this service, they simply coopted a friendly-sounding rationale in an attempt to dismiss skeptics.
    - rblatz 6y ago
      And we all benefit through lower bid/ask spreads
    - pgwhalen 6y ago
      "Market maker" refers to a "role" in a market. HFT is simply one way that role is fulfilled, in some markets (equities, futures, ...) but perhaps not others (corporate bonds, MBS, ...). No market needs HFTs to provide the service, but they exist because in those markets they provide a monumentally better (cheaper) service than their predecessors.
    - rcxdude 6y ago
      You don't need HFT, but those market makers lost to HFT on price. HFT is far far cheaper than the old market makers.
mdtusz 6y ago
I've never liked this explanation because most HFT is just front-running. The liquidity is there already, they're just shaving their cut off the top in most cases because they can move faster than everyone else.
- neolog 6y ago
  Isn't the market more liquid if new prices come in every day rather than every week?
- vmception 6y ago
  The market is already liquid and also more liquid. Strategies that had less efficacy at $100mm position sizes now can scale to $10bn position sizes. I like the growth of liquidity.
- SamReidHughes 6y ago
  HFT is not front-running. Front-running is a form of trading on non-public information.
  - bananaface 6y ago
    Some forms of HFT work by getting information from other exchanges before you, then front-running on price differences.
    - SamReidHughes 6y ago
      That's not what front-running is.
    - lucaspauker 6y ago
      This is arbitrage, not front running. Front running requires not-public information.
    - denotational 6y ago
      Front-running usually refers to a fairly specific scenario in which a brokerage or fiduciary executes orders as principal prior to dealing on behalf of their client so as to benefit from a market movement they anticipate will be caused by the client's orders. This is categorically not what HFT firms are doing.
dtech 6y ago
While this argument holds some merit for intermediaries in general, it provides no argument why boring a $300M hole in a mountain for a 3ms speed improvement adds any value.
- oceanplexian 6y ago
  The people who bored the hole were paid a wage that allowed them to support their families. The company that made the boring machine received more capital to develop better machines. The company that made the fiber employed thousands of workers and engineers who are advancing the state of material science. The engineers who built the optics are furthering our ability to drive down the cost high speed data transmission. The provider operating the circuit is paying hundreds of employees and engineers who build out new infrastructure for other customers, universities, businesses. The HFT firm can now build a datacenter outside of the metro, freeing up land to house residents in the city. Banks can take advantage of the liquidity to reduce transaction risk and offer lower rates on financial products to customers. Customers who spend less on loans and credit have more money to spend on other things. This process goes on, and on, and on. It’s why capitalism is so effective as an economic system. And also the reason why things that may not seem like they produce value actually produce extraordinary value for society.
  - jlokier 6y ago
    By that argument, any kind of "make work", doing something pointless, provides value to society as a side effect. For example: Consider a job going to the office to write on pieces of paper and then throw those pieces of paper into the incinerator so nobody will ever read what was written. Sounds pointless. Is it "providing value"? By your argument yes: All those people were paid and can now support their families. The paper makers made paper and advanced the state of the art in fine paper-making, as did the pen makers and the ink makers. The incinerator is looked after, and it keeps new incinerator designers in work. All the fuel which is mined to run the incinerator keeps miners busy. All the commuting to the office and back keeps train operators busy. And yet, going to the office to write things on paper and then destroy them repeatedly does seem rather pointless.
- 6y ago

MereInterest 6y ago

Isn't the liquidity only worthwhile at times of low liquidity? The ability to quickly exchange shares only matters at times when you want to exchange shares quickly. The only time when you care about exchanging shares quickly is if the price is changing quickly. Those are exactly the times when HFT is the riskiest, and the most likely to be shut off to avoid losses. (For example, shutting off HFT as a response to the 2010 flash crash[0].) I get the argument, but it feels like the societal benefit is taken away whenever it is needed, and paid for only when it isn't needed. [0] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash

lucaspauker 6y ago
Good point. Here is an in-depth analysis from the NY Fed: https://libertystreeteconomics.newyorkfed.org/2015/08/liquidity-during-flash-events.html https://libertystreeteconomics.newyorkfed.org/2015/08/liquid...
derriz 6y ago
I don't think I get your point. Correct me if I'm wrong but it seems to be that you're suggesting that if I want to sell some of my shares, for example, that I should wait until volatility is low? If I had a way of knowing when the market would have low volatility, I'd throw away the shares and become a billionaire trading options. Saying you should wait for low volatility before trading is equivalent to saying you should wait until the price is high before selling. Both statements seem to reflect common sense but neither piece of advice can be translated into an actual strategy. The impact of HFT market making isn't that difficult to observe - all markets which have attracted such participants have seen huge falls in spreads. The spread is a tax on everyone who buys and sells in the market so lower spreads are good for everyone. (For example the cost of buying and selling a DAX future before fees was about 70 euro just 15 years ago while the spread is now typically less than a euro.)
thedufer 6y ago
> Isn't the liquidity only worthwhile at times of low liquidity? No, because liquidity is also about tighter spreads. Since the spread is effectively a transaction fee paid to buy or sell on exchanges, shrinking it is beneficial to most market participants.

deanCommie 6y ago

Honest naive question - Just because HFT firms provide liquidity does that mean it is the ONLY way such liquidity could be provided?

lucaspauker 6y ago
Market makers provide liquidity as a service. HFT firms are market makers: https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
- buck4roo 6y ago
  Long before HFT firms, we had Market Makers -- they were often a separate department of the brokerage firm you were already using. Therefore, Markets don't need HFT firms to provide this service, they simply coopted a friendly-sounding rationale in an attempt to dismiss skeptics.
  - rblatz 6y ago
    And we all benefit through lower bid/ask spreads
  - pgwhalen 6y ago
    "Market maker" refers to a "role" in a market. HFT is simply one way that role is fulfilled, in some markets (equities, futures, ...) but perhaps not others (corporate bonds, MBS, ...). No market needs HFTs to provide the service, but they exist because in those markets they provide a monumentally better (cheaper) service than their predecessors.
  - rcxdude 6y ago
    You don't need HFT, but those market makers lost to HFT on price. HFT is far far cheaper than the old market makers.

mdtusz 6y ago

I've never liked this explanation because most HFT is just front-running. The liquidity is there already, they're just shaving their cut off the top in most cases because they can move faster than everyone else.

neolog 6y ago
Isn't the market more liquid if new prices come in every day rather than every week?
vmception 6y ago
The market is already liquid and also more liquid. Strategies that had less efficacy at $100mm position sizes now can scale to $10bn position sizes. I like the growth of liquidity.
SamReidHughes 6y ago
HFT is not front-running. Front-running is a form of trading on non-public information.
- bananaface 6y ago
  Some forms of HFT work by getting information from other exchanges before you, then front-running on price differences.
  - SamReidHughes 6y ago
    That's not what front-running is.
  - lucaspauker 6y ago
    This is arbitrage, not front running. Front running requires not-public information.
  - denotational 6y ago
    Front-running usually refers to a fairly specific scenario in which a brokerage or fiduciary executes orders as principal prior to dealing on behalf of their client so as to benefit from a market movement they anticipate will be caused by the client's orders. This is categorically not what HFT firms are doing.

dtech 6y ago

While this argument holds some merit for intermediaries in general, it provides no argument why boring a $300M hole in a mountain for a 3ms speed improvement adds any value.

oceanplexian 6y ago
The people who bored the hole were paid a wage that allowed them to support their families. The company that made the boring machine received more capital to develop better machines. The company that made the fiber employed thousands of workers and engineers who are advancing the state of material science. The engineers who built the optics are furthering our ability to drive down the cost high speed data transmission. The provider operating the circuit is paying hundreds of employees and engineers who build out new infrastructure for other customers, universities, businesses. The HFT firm can now build a datacenter outside of the metro, freeing up land to house residents in the city. Banks can take advantage of the liquidity to reduce transaction risk and offer lower rates on financial products to customers. Customers who spend less on loans and credit have more money to spend on other things. This process goes on, and on, and on. It’s why capitalism is so effective as an economic system. And also the reason why things that may not seem like they produce value actually produce extraordinary value for society.
- jlokier 6y ago
  By that argument, any kind of "make work", doing something pointless, provides value to society as a side effect. For example: Consider a job going to the office to write on pieces of paper and then throw those pieces of paper into the incinerator so nobody will ever read what was written. Sounds pointless. Is it "providing value"? By your argument yes: All those people were paid and can now support their families. The paper makers made paper and advanced the state of the art in fine paper-making, as did the pen makers and the ink makers. The incinerator is looked after, and it keeps new incinerator designers in work. All the fuel which is mined to run the incinerator keeps miners busy. All the commuting to the office and back keeps train operators busy. And yet, going to the office to write things on paper and then destroy them repeatedly does seem rather pointless.
6y ago