4 ms·

How does a spread make people lose money? Trades only happen if the buyer and seller agree on a price.

• kasey_junk 6y ago
  Lower spreads are good for people who aren’t price sensitive but are getting in or out of positions for other reasons than market microstructure. This is largely everyone. If you need to rebalance your portfolio into more cash, say because you are paying for college, the lower the spread the lower your transaction cost.
• ikrenji 6y ago
  it doesnt. HFT is pure rent seeking
  • sgt101 6y ago
    I wonder what the amount of money made by HFT taking advantage of "natural arbitrage opportunities" is, and how it compares to HFT as pure front running of known orders? My guess is ~0 vs ~lots.
    • baybal2 6y ago
      If it was so, they wouldn't be losing money, closing the shop. Quite a number of them went under. So even such clearest cut front-running is not a fool proof strategy with "money out of thin air." Seeing somebody saying "give me money, and I will multiply them with some magic mumbo jumbo" they themselves don't seem to understand, if the most usual investment industry hot air.
    • Arnt 6y ago
      The big natural arbitrage opportunity is other people's coarse-grained price changes. HFTs make finer-grained changes at shorter intervals, and so win trades that the exchange directs to the best offer. If being a market maker is profitable, then this profit derives from executing trades. Because the exchange directs trade to the best offer, the profit goes to whoever offers the best price, which is whoever adjusts its offer prices quickest. That's the recipe for HFT.
• bluGill 6y ago
  Lower spread is the difference between the price you can buy vs sell at. Most people do not trade stock directly - they use a middleman, called a market maker. This is computer now, but back in 1890 (picking a date where there were stock markets, but obviously no computers) there were people who worked on the floor of the various stock exchanges called market makers. They own a bunch off shares of one company, and agree to buy or sell to anyone. When some broker (ie agent for a trader who may not live in the same city) walks on the floor wanting to buy stock they don't have to wait for someone else walking on willing to sell, instead they go to this person who is always willing to sell stock. Latter when broker (again agent for a trader) wants sell stock the market maker will buy their shares. This is much quicker than the two traders needing to find each other and agree to a price. The market maker makes money be the spread. When the two traders above buy or sell with the trader they don't get the same price. Instead if the stock is listed for $10/share the person buying is really paying an extra price, $11/share (for example it is almost always pennies), and the person selling actually is getting $9/share (again an absurd example). The market marker is thus making $1/share for every share of stock traded. The spread thus clearly is taking money from the traders. This is above the money you have to pay your broker to make the trade for you.