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HFT firms make the market. That is they place orders in the market that form the bid/ask spread. So I'll be an HFT and market make quoting $90 bid, $100 ask for

HFT firms make the market. That is they place orders in the market that form the bid/ask spread. So I'll be an HFT and market make quoting $90 bid, $100 ask for S&P500. This means if you were to buy 1 lot and sell 1 lot it'd cost you $10 (you bought at 100 and sold again at 90). The reason I have a spread between bid and ask is because I'm taking a risk that someone will take me up on the offer, the market will move against me and I'll lose money. Now, I install a much faster connection to the exchange, which means I can respond to market events faster, and so if the market moves against me I can move my position or cancel my orders or I can buy a hedge much quicker. So the risk of losing money is lower, so now I can quote $94 bid, $96 ask. By quoting tighter I can beat my competitors and more people will trade against me. So now you can buy 1 lot, sell 1 lot and it'll cost you $2. So the better these HFT firms are, the less it costs you to get in and out of the positions you want.

magicalhippo 6y ago
Thank you for the explanation. I was under the impression the HFT's raced my moves instead of sitting there waiting for me.
- Arnt 6y ago
  They do, in a way... A HFT typically has a given stock of Siemens and offers to buy and sell. Suppose one has 100 shares and offers to buy and sell two, you want to buy forty. You'll get two, and the HFT will put two more on the market, at slightly higher prices, and wait to see whether you buy. How much higher/lower? Obviously they'd like to raise the price quickly to the highest price you'll pay, without raising it so high that you buy from someone else, and equally obviously you don't tell them what price that is. Will the HFT firm's software have better heuristics than your broker's?
nicoburns 6y ago
Why do they get to make the market and you don't? Why do they have the power to set this spread? Wouldn't you also want to e.g. buy $90 and ask $100 to mitigate your own risk? Where does the asymmetry come from?
- kasey_junk 6y ago
  Absolutely nothing prevents you from making a market right now and it’s cheaper than it’s ever been. Download Robinhood. Fund your account. Buy a share. Put a limit order to sell it at one price and a buy order at another lower price. Congrats, you’ve made a market.

magicalhippo 6y ago

Thank you for the explanation. I was under the impression the HFT's raced my moves instead of sitting there waiting for me.

Arnt 6y ago
They do, in a way... A HFT typically has a given stock of Siemens and offers to buy and sell. Suppose one has 100 shares and offers to buy and sell two, you want to buy forty. You'll get two, and the HFT will put two more on the market, at slightly higher prices, and wait to see whether you buy. How much higher/lower? Obviously they'd like to raise the price quickly to the highest price you'll pay, without raising it so high that you buy from someone else, and equally obviously you don't tell them what price that is. Will the HFT firm's software have better heuristics than your broker's?

nicoburns 6y ago

Why do they get to make the market and you don't? Why do they have the power to set this spread? Wouldn't you also want to e.g. buy $90 and ask $100 to mitigate your own risk? Where does the asymmetry come from?

kasey_junk 6y ago
Absolutely nothing prevents you from making a market right now and it’s cheaper than it’s ever been. Download Robinhood. Fund your account. Buy a share. Put a limit order to sell it at one price and a buy order at another lower price. Congrats, you’ve made a market.