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Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier.

Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier. So if you are a buyer in a crisis - you get a better deal with HFTs quickly matching supply/demand of large stock orders. If you are a seller - you're screwed either way - HFT or not (see history).

001sky 14y ago
and on favourable terms to you Not so much when they front-run you...LOL
- confluence 14y ago
  During a liquidity crisis - aka any crisis - buyers don't get front run - sellers do. There is a reason for this - front running only occurs when you want something (liquidity) without having to pay for it first. For example: You want to off load a metric ton of stock in a company - you tell your broker - he puts out a VWAP sell call to an algorithm - HFTs realise - they short sell to anticipate your liquidity premium (aka you want to sell NOW and you are willing to pay for it). If you didn't want to get out so bad - you cannot be front run - because you wouldn't demand a liquidity premium.
  - 001sky 14y ago
    Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier. Maybe there is a terminology glitch. Buy side and Sell side mean something else, generally. Buy side is commonly referred to people holding asset on book, and sell side are capital raisers or intermdiaries. If I'm buy side, I want liquidity -- period. HFT does not provide liquidity, it provides decreased "viscosity". As you note, (observed) liquidity evaporates under high Vol. Which, if it were true liquidity, or if markets participants met the threshold assumpyions of EMH, would not be the case. If you're trying to differentiate two sides to a trade on an exchange, that's usually referred to as Bid/Ask. Again, observed lack of liquidity on one side or the other (or: massive spreads), signify commonly held assumptions about the markets are askew. If we throw away EMH behavioural assumpyions, and we throw away liquidity, what we are left with is the following: (1) Opportunistic market participants;and (2) Ultra-low transaction viscosity. These are a shitty combination, from the perspective of public policy. The lack of viscosity actually increases the returns to increasingly obscure and opaque methods of market maniplation.
AndrewKemendo 14y ago
Buying really isn't worth anything if you never plan to sell however...so.
- Evbn 14y ago
  So don't sell during a crisis.
  - confluence 14y ago
    It really is that simple.
    - Patient0 14y ago
      Buying in the dips might give you a median positive return (95% of the time you'll come out ahead) - but your expected return can easily still be negative due to what happens the other 5% of the time. If you're following a very simple strategy based on past returns that seems to make money all the time, you should wonder what the rest of the market is afraid of that you can't see. Imagine how well a "buy in the dips" strategy would pan out if you executed it during the Great Depression: http://stockcharts.com/freecharts/historical/djia19201940.html http://stockcharts.com/freecharts/historical/djia19201940.ht... If you bought in at 200 after the market had plummeted from 380 down to 200, you'd probably be thinking your strategy is working pretty well - especially once it rallied back to 290 or so. But after that point you'd be waitinga LONG TIME to get your money back. It wasn't until 20 years later - the 1950's!! - that the DJIA finally sustained a level above 240 (and not before falling to 40 - good luck staying solvent through that!!). And this is only because the US economy did eventually recover (thanks to World War II). Argentina's stock market never did recover. There's no such thing as "time diversification". In the long run, the variance of your annualized return increases: http://www.norstad.org/finance/risk-and-time.html http://www.norstad.org/finance/risk-and-time.html This is why the DJIA fell to 6500 in Oct 2009. If you bought then, you are probably feeling pretty smug now - but it's simply that the rest of the market was afraid of Great Depression II and you may not have even realised that it was a possibility. To say that you can obtain a positive expected return by following any strategy that is solely based on what the price has done recently is just as "naive" as a retail investor who thinks they can beat HFT algorithms. As the SEC says: "Past returns are never an indicator of future performance"

001sky 14y ago

and on favourable terms to you Not so much when they front-run you...LOL

confluence 14y ago
During a liquidity crisis - aka any crisis - buyers don't get front run - sellers do. There is a reason for this - front running only occurs when you want something (liquidity) without having to pay for it first. For example: You want to off load a metric ton of stock in a company - you tell your broker - he puts out a VWAP sell call to an algorithm - HFTs realise - they short sell to anticipate your liquidity premium (aka you want to sell NOW and you are willing to pay for it). If you didn't want to get out so bad - you cannot be front run - because you wouldn't demand a liquidity premium.
- 001sky 14y ago
  Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier. Maybe there is a terminology glitch. Buy side and Sell side mean something else, generally. Buy side is commonly referred to people holding asset on book, and sell side are capital raisers or intermdiaries. If I'm buy side, I want liquidity -- period. HFT does not provide liquidity, it provides decreased "viscosity". As you note, (observed) liquidity evaporates under high Vol. Which, if it were true liquidity, or if markets participants met the threshold assumpyions of EMH, would not be the case. If you're trying to differentiate two sides to a trade on an exchange, that's usually referred to as Bid/Ask. Again, observed lack of liquidity on one side or the other (or: massive spreads), signify commonly held assumptions about the markets are askew. If we throw away EMH behavioural assumpyions, and we throw away liquidity, what we are left with is the following: (1) Opportunistic market participants;and (2) Ultra-low transaction viscosity. These are a shitty combination, from the perspective of public policy. The lack of viscosity actually increases the returns to increasingly obscure and opaque methods of market maniplation.

AndrewKemendo 14y ago

Buying really isn't worth anything if you never plan to sell however...so.

Evbn 14y ago
So don't sell during a crisis.
- confluence 14y ago
  It really is that simple.
  - Patient0 14y ago
    Buying in the dips might give you a median positive return (95% of the time you'll come out ahead) - but your expected return can easily still be negative due to what happens the other 5% of the time. If you're following a very simple strategy based on past returns that seems to make money all the time, you should wonder what the rest of the market is afraid of that you can't see. Imagine how well a "buy in the dips" strategy would pan out if you executed it during the Great Depression: http://stockcharts.com/freecharts/historical/djia19201940.html http://stockcharts.com/freecharts/historical/djia19201940.ht... If you bought in at 200 after the market had plummeted from 380 down to 200, you'd probably be thinking your strategy is working pretty well - especially once it rallied back to 290 or so. But after that point you'd be waitinga LONG TIME to get your money back. It wasn't until 20 years later - the 1950's!! - that the DJIA finally sustained a level above 240 (and not before falling to 40 - good luck staying solvent through that!!). And this is only because the US economy did eventually recover (thanks to World War II). Argentina's stock market never did recover. There's no such thing as "time diversification". In the long run, the variance of your annualized return increases: http://www.norstad.org/finance/risk-and-time.html http://www.norstad.org/finance/risk-and-time.html This is why the DJIA fell to 6500 in Oct 2009. If you bought then, you are probably feeling pretty smug now - but it's simply that the rest of the market was afraid of Great Depression II and you may not have even realised that it was a possibility. To say that you can obtain a positive expected return by following any strategy that is solely based on what the price has done recently is just as "naive" as a retail investor who thinks they can beat HFT algorithms. As the SEC says: "Past returns are never an indicator of future performance"