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He's saying (I believe) that the only positive externality of HFT is a slight reduction in pricing errors. If the pricing errors were very large, then HFT would
by msellout 15y ago
He's saying (I believe) that the only positive externality of HFT is a slight reduction in pricing errors. If the pricing errors were very large, then HFT would be providing a valuable service. The implication of the quarter versus dime metaphor is that the efficiency gain provided by HFT is very small.
However, my own study suggests the true situation is worse than he claims. Though HFT does appear to increase efficiency most of the time, it also creates sudden flares of inefficiency at the times when a well-functioning market is most needed.
- yummyfajitas 15y agoHow does HFT create "sudden flares of inefficiency"?
- sireat 15y agoHFT provides liquidity(a good thing) except when you most need it in times of uncertainty. Example, was the flash crash(I read the report and other sources), HFT algorithms (and people too) decided it was getting too risky to provide spreads and just decided to stop trading. The old market maker system is gone, and we really do not have a substitute that can handle the unpredictable. That is, HFTs are free to get paid for providing liquidity, but they are also free to pack up the shop and leave, if "things get heavy". This does not serve institutional and retail investors.
- yummyfajitas 15y agoDuring the flash crash, HFTs did not pull out due to market risk. They pulled out due to regulatory risk. See my explanation here. http://news.ycombinator.com/item?id=2875927 http://news.ycombinator.com/item?id=2875927 If HFT's save retail investors and institutions billions of dollars most of the time, but fail to do so for a single 1-hour period when they run the risk of regulators screwing them over, what's the problem?
- anamax 15y ago> Example, was the flash crash(I read the report and other sources), HFT algorithms (and people too) decided it was getting too risky to provide spreads and just decided to stop trading. Note the word "people".... Are you claiming that someone (or something) has an obligation to trade? Who? (If the answer isn't you....) Why? > The old market maker system is gone, and we really do not have a substitute that can handle the unpredictable. We had "flash crashes" during the old market maker system too, so if you're claiminging that human market makers prevent flash crashes ....
- barry-cotter 15y agoHe's probably talking about stop orders that lots of people put in for outsize volatility because the regulators do rollbacks. That means liquidity dries up, right?
- yummyfajitas 15y agoAssuming you mean stop loss orders, HFT's don't use them. Idiot retail investors do. I have no idea what the rest of your comment is talking about.