2 ms·

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

by 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.
- 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.

by nandemo 15y ago

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.
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.