4 ms·

But the paper also rightly ends with a further caveat: While we do control for share price levels and volatility in our empirical work, it remains an open ques

But the paper also rightly ends with a further caveat: While we do control for share price levels and volatility in our empirical work, it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets.

cma 15y ago
Its pretty much a tax; take out all the day traders and whether you gain or lose due to the spread is more or less random; day traders and hft traders narrow the spread, but since whether you gained or lost was random and they are now capturing a piece of that spread, they (err, ashamedly, we) are basically just taxing everyone. A nominal transaction tax would eliminate most of the ultra-high frequency stuff and could be put to better use. Volumes would drop and spreads would widen, but it wouldn't really matter up to some reasonable amount.
- puzzler314 15y ago
  I'm not sure a nominal transaction tax would eliminate high frequency trading. HFT guys already pay fees to the exchanges and regulators. Either way, you're right, an increased fee would simply be passed to investors in the form of an increased spread.
  - jessedhillon 15y ago
    Some HFTers execute thousands of trades a day which are cancelled within a few ms -- they are just pinging the market to see how liquidity is at certain price levels, or looking for an opportunity to get out in front of a large quantity trade. This would prevent or impair such traders.
- fr0sty 15y ago
  In what way is gaining or losing the spread "random"? Buyers pay the offer, sellers the ask. If you want to save the spread you can leave a resting order and wait for someone to take you out but you have no guarantee of a fill (or at least a timely one).
- nandemo 15y ago
  Wait, what? Individual traders who are value-oriented or technical traders, as well as mutual funds etc, gain money on "buy low, sell high". Of course mutual funds and the like do so on a very long term basis. In any case, they pay the spread. So if the spread is narrower then they make more money in average. Example: if the Apple's quote is 95/105 (buy/sell) today and 105/115 tomorrow, an invidual trader buying and selling would just break even (buy at 105 and sell at 105) even though Apple's notional fair value has risen. But if there are more market makers, the quotes would be 99/101 and 109/111. Then our individual trader would make 109 - 99 = 10 in the same market conditions. You're right that a wider spread wouldn't matter much to an individual trader, but that's mainly because their main cost is trading fees (paid to the broker) anyway. For mutual funds, though, a 1 basis-point change in the spread means a lot of money.
  - cma 15y ago
    What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way. Sometimes you'd lose more due to this, sometimes you'd make more. But it would be a "fair" coin. Let's say on average it was $0.01 per dollar. As soon as someone entered the market with some microstructure expertise and strategy, everyone but the microstructure guy starts making (say) $0.005 half the time and losing $0.006 the other half. Reducing some of the randomness and providing more consistency is certainly worth something; you can imagine an example where it was +/- $0.50 per dollar reduced to +$.005, - $.006, but note (assuming the same dollar volume) that the HFT guy would still be making the same amount of money as in the previous example, where he was providing much less value. I.e. the cost that HFT commands isn't strongly tied to the value it provides. This is without even delving into the latency-arbitrage arms race cluster fuck.
    - nandemo 15y ago
      > What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way. No it wouldn't. Unless you make some really odd assumptions (like the traders are monkeys), you could still have tons of limit orders and NO executions. That's what happens to iliquid stocks.

cma 15y ago

Its pretty much a tax; take out all the day traders and whether you gain or lose due to the spread is more or less random; day traders and hft traders narrow the spread, but since whether you gained or lost was random and they are now capturing a piece of that spread, they (err, ashamedly, we) are basically just taxing everyone. A nominal transaction tax would eliminate most of the ultra-high frequency stuff and could be put to better use. Volumes would drop and spreads would widen, but it wouldn't really matter up to some reasonable amount.

puzzler314 15y ago
I'm not sure a nominal transaction tax would eliminate high frequency trading. HFT guys already pay fees to the exchanges and regulators. Either way, you're right, an increased fee would simply be passed to investors in the form of an increased spread.
- jessedhillon 15y ago
  Some HFTers execute thousands of trades a day which are cancelled within a few ms -- they are just pinging the market to see how liquidity is at certain price levels, or looking for an opportunity to get out in front of a large quantity trade. This would prevent or impair such traders.
fr0sty 15y ago
In what way is gaining or losing the spread "random"? Buyers pay the offer, sellers the ask. If you want to save the spread you can leave a resting order and wait for someone to take you out but you have no guarantee of a fill (or at least a timely one).
nandemo 15y ago
Wait, what? Individual traders who are value-oriented or technical traders, as well as mutual funds etc, gain money on "buy low, sell high". Of course mutual funds and the like do so on a very long term basis. In any case, they pay the spread. So if the spread is narrower then they make more money in average. Example: if the Apple's quote is 95/105 (buy/sell) today and 105/115 tomorrow, an invidual trader buying and selling would just break even (buy at 105 and sell at 105) even though Apple's notional fair value has risen. But if there are more market makers, the quotes would be 99/101 and 109/111. Then our individual trader would make 109 - 99 = 10 in the same market conditions. You're right that a wider spread wouldn't matter much to an individual trader, but that's mainly because their main cost is trading fees (paid to the broker) anyway. For mutual funds, though, a 1 basis-point change in the spread means a lot of money.
- cma 15y ago
  What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way. Sometimes you'd lose more due to this, sometimes you'd make more. But it would be a "fair" coin. Let's say on average it was $0.01 per dollar. As soon as someone entered the market with some microstructure expertise and strategy, everyone but the microstructure guy starts making (say) $0.005 half the time and losing $0.006 the other half. Reducing some of the randomness and providing more consistency is certainly worth something; you can imagine an example where it was +/- $0.50 per dollar reduced to +$.005, - $.006, but note (assuming the same dollar volume) that the HFT guy would still be making the same amount of money as in the previous example, where he was providing much less value. I.e. the cost that HFT commands isn't strongly tied to the value it provides. This is without even delving into the latency-arbitrage arms race cluster fuck.
  - nandemo 15y ago
    > What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way. No it wouldn't. Unless you make some really odd assumptions (like the traders are monkeys), you could still have tons of limit orders and NO executions. That's what happens to iliquid stocks.