4 ms·
I don't think it's as simple as all that. There are legitimate parties at either end of a stock transaction, and the HFT's are pretty much just siphoning off s
by drblast 14y ago
I don't think it's as simple as all that. There are legitimate parties at either end of a stock transaction, and the HFT's are pretty much just siphoning off small amounts of the proceeds. The reason this can occur is that our government ensures that public companies have to do business this way. And all of these rules are in place for good reasons and it works pretty well, but HFT is an aberration.
A good analogy is credit card companies; it's perfectly rational for a customer to use a rewards credit card and pay it off at the end of every month, and it's perfectly rational for a merchant to allow credit card transactions for convenience. Arguably, however, the credit card company is little else but a 3-5% drain on the economy, especially for brick-and-mortar stores.
That said, credit card companies provide some value in the form of convenience, so maybe the transaction fee is worth it. HFT's, however, provide no benefit to anyone but themselves. The transactions would still occur whether or not the HFT existed. The distinction Mark Cuban makes between "investors" and "traders" is an astute one.
- deleted 14y ago[deleted]
- jamii 14y agoBrick-and-mortar stores themselves don't create anything. They buy in bulk and sell at a markup, thus adding liquidity to the grocery market. Imagine if you had to buy carrots by the tonne.
- ajtulloch 14y agoThis is flat out wrong. The correct analogy is: Before HFT, to execute a block trade, your only option was to go to a specialised liquidity provider a.k.a your friendly local investment bank - the CC company in your analogy - , who would take a huge spread - the 3%-5% drain on the economy that you mentioned - in exchange for taking that liquidity risk. Now, with HFT, the increased speed of markets has democratised liquidity provision. There is a corresponding larger supply of liquidity in the markets, and so spreads have come down - very significantly. The aggregate affect - it is now cheaper to trade on stock exchanges. What does this mean? When your 401(k), pension fund, mutual fund, etc. rebalances, it doesn't lose 3% of your money to an investment bank. It loses ~0.01%-0.05% (1-5bp) of your money as a transaction cost (earned by HFT firms as compensation for taking on the liquidity risk), and thus you keep more of your money. It's easy to say that HFT's provide 'no benefit to anyone but themselves' without any understanding of the historical context, but once you do, it's hard to see it in such black and white terms. Full disclosure - I was an algo trader in a previous life.
- mistermann 14y agoOk, this seems plausible, however, I am skeptical. Do you have any data or studies proving out these theories, including data that would give credence to the idea that the $ taken out of the market now due to HFT is less than that taken out by old fashioned liquidity providers?
- ajtulloch 14y agohttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695460 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695460; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722924 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722924; http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2010.01624.x/pdf http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2010....; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1970072 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1970072 http://www.sec.gov/comments/s7-02-10/s70210-122.pdf http://www.sec.gov/comments/s7-02-10/s70210-122.pdf