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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 qu

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.

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.