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OK, answer me this: How does an HFT, in practice, add liquidity to a market? None of the examples given showed liquidity being added, because the people involve
by SomeCallMeTim 14y ago
OK, answer me this: How does an HFT, in practice, add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there.
Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes.
At best an HFT will cut a few minutes (more often seconds) off of the time of a trade. Anyone who is worried about waiting a few minutes for a trade to complete is Doing It Wrong. Therefore, the "liquidity" HFTs provide is only in the cases where it's not truly needed because the volume is high enough to provide it anyway.
I've traded in a lot of stocks where there was very little liquidity, and fewer than a few dozen trades would happen per day. I'd sometimes wait hours for a trade to complete. Where are all the HFTs providing me "liquidity"? They weren't anywhere to be found, because in the cases where the volume is too low HFTs can't make a sure bet. And when the volume is high, they aren't needed. So what good are they again? At any point that an HFT is willing to buy stock, it's because there's a high likelihood that someone will show up to pay more after a few seconds or minutes.
IMO the popular media actually has it right. HFTs really are just stealing pennies on every transaction, because they only enter a stock and "add liquidity" if and when the stock doesn't need it.
The onus isn't on me to prove they aren't providing liquidity, but on the HFTs to prove they are, and the OA doesn't even come close. In every example OP gives, the people actually buying and/or selling stock would have been better off without the HFTs in the mix (at best their trades were a few minutes faster).
If we just taxed or put a fee on a "short term hold" of a stock, say less than one day, then high frequency trading would vanish. I see HFTs as a parasite on a broken system, nothing more, and I'm shocked that so many HNers idolize them.
- harryh 14y ago> How does an HFT, in practice, add liquidity to a market? Bid/ask spreads used to be 10 cents or more. Now they're generally a penny. That is evidence of a more liquid market. In practice, this is because computers are now market makers instead of humans so they can do this job at a lower cost.
- yummyfajitas 14y agoNone of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. The bid/ask spread is now $0.50 and Fry has not traded. In this case Fry is better off with Leela in the market. At any point that an HFT is willing to buy stock, it's because there's a high likelihood that someone will show up to pay more after a few seconds or minutes. If you want to take that risk, place an ALO order at the bid or ask price. You won't cross the spread, though your order might go unfilled. The fact that most people don't place ALO orders suggests they don't want to take the risk.
- bo1024 14y agoWill your proposal be along the lines of "only allow trades every x (milli) seconds, and randomize among the bids/asks submitted in the most recent time interval"? This seems like the most natural, simple solution one might suggest. How does it sound to you? (Edit: sorry, this doesn't really relate particularly to this sub-topic.)
- yummyfajitas 14y agoNo, my proposal is much simpler.
- wtvanhest 14y agoI don't think that SomeCallMeTim understands that 0.10/share is a lot of money ($100,000) when a mutual fund is trading 1 million shares over 10 days. Now mulitply that by 60 holdings which are turned over 100% per year and you can see why pensions would want those mutual funds to save $6,000,000/year in liquidity costs. (Obviously mutual funds don't just do program trades, they also negotiate directly with each other etc. but the example still stands).
- pdovy 14y ago
- davidmr 14y ago> Anyone who is worried about waiting a few minutes for a trade to complete is Doing It Wrong. Why do you get to decide that? I could think of several examples where I would be concerned about a trade happening quickly (hedging bets made elsewhere, breaking news affecting the underlying value of a product, etc.)
- sailfrog 14y agoThe way I am reading these comments it would seem that HNers are more curious than idolizing. Personally I do not believe that the length of time in which an entity chooses to own a stock makes that entity inherently bad or good. It is not unreasonable to think a fast execution could make a position unprofitable if delayed by minutes, and I fail to see how that is doing anything wrong.
- tptacek 14y agoThis exact logic suggests that all market makers are "parasites", and that any market that has them is Doing It Wrong. Why is it being taken seriously?