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Bid/ask spreads are far narrower than they were previously. If you look at the profits of the HFT industry as a whole they aren't that large (low billions) and

Bid/ask spreads are far narrower than they were previously. If you look at the profits of the HFT industry as a whole they aren't that large (low billions) and their dollar volume is in the trillions. Hard to argue that the industry is wildly prosocial but making spreads narrower does mean less money goes to middlemen.

sesuximo 2y ago
Why do high spreads mean more money for middlemen?
- Arnt 2y ago
  When you buy stock, you generally by it from a "market maker", which is a middleman. When you sell, you sell to a market maker. Their business is to let you buy and sell when you want instead of waiting for a buyer/seller to show up. The spread is their profit source.
  - sesuximo 2y ago
    Wouldn’t the price movement overwhelm the spread if you sell more than a few days after you buy? I guess if spreads were huge it would matter more
    - Arnt 2y ago
      The price movement does indeed overwhelm the spread. Half the time it goes up, half the time down.
      - Maxatar 2y ago
        >Half the time it goes up, half the time down. This is not true and in fact when I hire quants or developers, I have to spend a surprising amount of time even teaching people with PhD's in statistics that the random nature of the stock market does not mean that it's a coin toss. It's surprising the number of people who should know better think trading is just about being right 51% of the time, or that typically stocks have a 50/50 chance of going up or down at any given moment... What's closer to the truth is that stocks are actually quite predictable the overwhelming majority of the time, but a single mistake can end up costing you dearly. You can be right 95% of the time, and then lose everything you ever made in the remaining 5% of the time. A stock might go up 10 times in a row, and then on the 11th trial, it wipes out everything it made and then some.
        Arnt 2y ago
        Sorry about that, I didn't mean exactly half or anything like that. Still, I don't feel that it's wrong: Even on rereading, my phrasing seems to address GP's misunderstanding in an immediately accessible way. Which is better, a complicated answer that leads to proper understanding (if you understand it) or a simple answer that solves the acute misunderstanding (and leads to a smaller misunderstanding)? Both kinds of answer have merit IMO.
akira2501 2y ago
> but making spreads narrower does mean less money goes to middlemen. On individual trades. I would think you'd have to also argue that their high overall trading volume is somehow also a benefit to the broader market or at the very least that it does not outcompete the benefits of narrowing.
- jeffreyrogers 2y ago
  Someone is taking the other side of the trade. Presumably they have a reason for making that trade, so I don't see how higher volume makes people worse off. Probably some of those trades are wealth destroying (due to transaction costs) but it is destroying traders' and speculators' wealth, not some random person who can't afford it, since if you trade rarely your transaction costs are lower than before HFT became prominent.

sesuximo 2y ago

Why do high spreads mean more money for middlemen?

Arnt 2y ago
When you buy stock, you generally by it from a "market maker", which is a middleman. When you sell, you sell to a market maker. Their business is to let you buy and sell when you want instead of waiting for a buyer/seller to show up. The spread is their profit source.
- sesuximo 2y ago
  Wouldn’t the price movement overwhelm the spread if you sell more than a few days after you buy? I guess if spreads were huge it would matter more
  - Arnt 2y ago
    The price movement does indeed overwhelm the spread. Half the time it goes up, half the time down.
    - Maxatar 2y ago
      >Half the time it goes up, half the time down. This is not true and in fact when I hire quants or developers, I have to spend a surprising amount of time even teaching people with PhD's in statistics that the random nature of the stock market does not mean that it's a coin toss. It's surprising the number of people who should know better think trading is just about being right 51% of the time, or that typically stocks have a 50/50 chance of going up or down at any given moment... What's closer to the truth is that stocks are actually quite predictable the overwhelming majority of the time, but a single mistake can end up costing you dearly. You can be right 95% of the time, and then lose everything you ever made in the remaining 5% of the time. A stock might go up 10 times in a row, and then on the 11th trial, it wipes out everything it made and then some.
      - Arnt 2y ago
        Sorry about that, I didn't mean exactly half or anything like that. Still, I don't feel that it's wrong: Even on rereading, my phrasing seems to address GP's misunderstanding in an immediately accessible way. Which is better, a complicated answer that leads to proper understanding (if you understand it) or a simple answer that solves the acute misunderstanding (and leads to a smaller misunderstanding)? Both kinds of answer have merit IMO.

akira2501 2y ago

> but making spreads narrower does mean less money goes to middlemen. On individual trades. I would think you'd have to also argue that their high overall trading volume is somehow also a benefit to the broader market or at the very least that it does not outcompete the benefits of narrowing.

jeffreyrogers 2y ago
Someone is taking the other side of the trade. Presumably they have a reason for making that trade, so I don't see how higher volume makes people worse off. Probably some of those trades are wealth destroying (due to transaction costs) but it is destroying traders' and speculators' wealth, not some random person who can't afford it, since if you trade rarely your transaction costs are lower than before HFT became prominent.