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I guess I'll pose my question about HFT directly: what value do you add to the economy by being in the HFT business? Surely the markets must at some point be "
by adastra 14y ago
I guess I'll pose my question about HFT directly: what value do you add to the economy by being in the HFT business?
Surely the markets must at some point be "liquid enough". i.e. that the companies that are supposed to actually benefit from liquid markets no longer do see any additional benefit from increased speed. If trades could only be made once per day, then traders would be very, very hesitant to invest in a new company IPO, because if there was new information or a problem, they couldn't sell it for 24 hours, at which point the price could have plummeted. Companies would have a bona fide problem raising new capital.
But does that problem really still exist if trades could only be executed once per second? per quarter-second? Billions are now being made that justify shaving a few milliseconds off of a signal -- how do you justify that in terms of benefit to the companies?
I think its on the people who don't want HFT to be regulated out of existence to convince the rest of us that it actually has value for someone other than themselves and isn't basically legalized gambling.
- anonymoushn 14y agoIf you are a market participant, you benefit from tighter spreads. If you "regulate HFT out of existence," you will instead get to buy higher and sell lower.
- beagle3 14y agoNot necessarily. While it makes the spreads tighter for market orders, you could put a limit order in the middle of a larger spread and are likely to be matched. If you join the bid or the offer (and are satisfied), you'll actually buy lower and sell higher! So the real answer is: "If you are more patient, or smarter, you will pay less. If you are impatient or dumb, you will pay more.". And of course all of this ONLY applies to the most liquid 500 symbols or so, which are the HFT playground.
- anonymoushn 14y agoI was assuming that the desired course of action was to enter or exit a position, rather than to enter or exit a position with moderately high probability.
- beagle3 14y agoGenerally, the HFT player provides "impatience service" - they give you immediate execution, and charge you a fee for it. Unfortunately, since they invest in speed, they impose this service fee on everyone: When you join the bid or the offer, you are always behind the HFT player, and as a result you will only execute if there is a huge execution, or, (more probably) if the price moves against you. This aspect of HFT is completely fair, btw - the HFT players are taking a risk, and they should be rewarded for it. The part that is unfair is described very well by nanex in this thread - go read it.