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I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. I went to Wharton and some old friends are

I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. I went to Wharton and some old friends are in HFT and the one thing they all say, and I hear repeated everywhere, is that they provide liquidity to the market. Something about it just doesn't ring true to me. If it is in fact true I'd love to hear an explanation.

kasey_junk 13y ago
Liquidity has certainly gone up. Also, it is hard to prove a causal relationship, but with the rise of electronic trading and HFT, price spreads and fees have come down. I can't prove it, but I believe that insider trading is also much less rampant in modern electronic systems than it was in the older pit based markets.
- selmnoo 13y ago
  The liquidity it provides is often very low quality. When liquidity in the old days was added, the players involved had to operate under stricter regulations -- they had to post a quote that was part of the National Best Bid and Offer a minimum percentage of time. With HFT it's a wild west scenario. There's a lot of uncertainty and risk of failure in many of its steps.
  - sseveran 13y ago
    That is categorically incorrect. HFT firms like Getco are official market makers and have all the same responsibilities.
- beagle3 13y ago
  Re: spreads & fees: Price spreads and fees have come down as a result of electronic trading being open to everyone, and is probably independent of HFT (at least, modern HFT): E.g., The decreased spreads and fees were happening in europe in the early 2000s, when fastest updates were at 1/4 second, and slower updates were at 2 seconds. The nanosecond scale was not the reason for this. Re liquidity: it depends how you define liquidity. If you define it by "the average size at the bid or offer and next few price levels" or "volume traded", then yes - HFT has helped liquidity tremendously. If you define it as "the probability that a large order can complete", then liquidity has NOT gone up. With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty. If you need to execute a large order, you observe that you do not have the amazing liquidity everyone in HFT is talking about. Re insider trading: I wouldn't bet on it. With electronic trading, it's now easier to do insider trading slowly without attracting much attention. Furthermore, HFT has created new forms of fraud, so far unregulated: see e.g. http://www.nanex.net/aqck2/4329.html http://www.nanex.net/aqck2/4329.html
  - AndrewBissell 13y ago
    > If you define it as "the probability that a large order can complete", then liquidity has NOT gone up. People seem to have this idea that back in the days of floor-based trading you could just call up the NYSE and say, "sell 1 million shares of Citigroup!" and the market makers would just kindly oblige you, without widening their spreads or trying to eke out a bigger gain from a transaction which inherently carries significant risk for them. It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. And as the large flow traders become more sophisticated and start to implement algos of their own, they'll get better at moving volume at a fairer average price. > With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty. I don't know about "often," unless you're talking about trading individual issues where news events introduce a high degree of uncertainty. There's really only been one case of a market-wide drying up of liquidity, which lasted for about 15 minutes during the flash crash. There's also nothing new about market-maker liquidity drying up in times of uncertainty or severe volatility. Plenty of stocks went "no bid" during the 1929 crash. Floor-based market makers are no more interested in standing in front of freight trains than algos are. If you're looking for someone/something to blame when markets crash and there are no bids to be found, focus on the Fed and its attempts to manipulate the credit cycle, which periodically fail in spectacular fashion.
    - tanzam75 13y ago
      > It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. Plenty of stocks went "no bid" during the 1929 crash. 1929 is an obsolete example. Heck, the SEC didn't even exist in 1929. A more relevant example is 1987 -- how many stocks went "no bid" on Black Monday? Here's how HFTs operate today. Bid furiously while the going is good. If you find yourself on the wrong side of a trade, you can always hit up the actual market-makers for a penny loss. And if the markets collapse, you pull out. What could be better? Supply liquidity when it's not needed, and stay out precisely when liquidity is most needed. Meanwhile, the registered market-makers are pulling back, or pulling out. And why not? They used to count on having the good times to balance out the bad. But now, the HFTs are siphoning off their profits during good times. Thus, the cross-subsidy has gone away. In periods of market stress, the HFTs go hide under a rock and don't participate in absorbing losses. The effect is: There are now fewer market-makers in periods of market stress. That's how HFTs have made things worse.
- pedrocr 13y ago
  I seem to recall that the research on this says that HFT is actually a net taker of liquidity and that their profits are fully funded (and then some) by other investors not really by making the market more efficient (they actually reduce efficiency). I've also heard stated many times that an exchange that only matches trades every X seconds would retain efficiency while eliminating HFT. This isn't the article I remember but goes into detail on most of these issues: http://www.demos.org/publication/cracks-pipeline-part-two-high-frequency-trading http://www.demos.org/publication/cracks-pipeline-part-two-hi...
Mikeb85 13y ago
They do provide liquidity. I can place a market order through my online broker, and have it execute in the time it takes my browser to refresh. This wasn't possible before HFT, and it allows retail investors to get much better trade execution.
- beagle3 13y ago
  Just to be clear, HFT these days mean microsecond round trip times between trading algorithms and exchanges. The situation you describe is thanks to electronic trading, and is also available in financial markets that are not dominated (not to say "infested") by HFT, such as currencies and CFDs.
  - kasey_junk 13y ago
    There is no industry standard clear definition of HFT. That is part of the problem surrounding any discussion of it. People use the term to mean some mix of the following: - Trading is primarily algorithmic, computers making buy/sell decisions with minimal human intervention. - Trading is high volume with many low quantity orders with short (millisecond, second, minute) hold times. - Trading decisions happen at low latency currently in the sub-microsecond time frame. It is better to think of these as dials than as hard requirements. Some algorithmic decisions take a very long time to make decisions, other electronic trading systems hold positions for weeks or even months. I've seen very low latency systems that only trade a few times per day. Finally, your currency trading example is perfect. The reason HFT's are less involved in those markets is that they are known to be dominated by insider deals and old boy network cronyism. It is not a "fair" place to trade. If HFT were to come in that may or may not change. I suspect it would get better.
    - beagle3 13y ago
      I think HFT is now universally regarded as "faster than human reaction time", which means the slowest HFT has a <200ms "time constant". HFT stands for "High Frequency". That has not meant minutes since 2008 at least. > It is not a "fair" place to trade. If HFT were to come in that may or may not change. I suspect it would get better. "HFT" and "fair" in the same sentence, with positive connotation. Now, that's funny: HFT in American exchanges these days is an all out, unregulated war of bits, and fairness is not an attribute you can associate with it - see e.g. http://www.nanex.net/aqck2/4329.html http://www.nanex.net/aqck2/4329.html ; The reason HFT stays away from currency is not because of being "fair" or "unfair" (no markets are fair, every market has privileged players). It's just that in currencies, the people you take money from own the system and will kick you out. They make their own rules. Whereas on ARCA and INET, the HFTs are the landlords and make their own rules (by quote stuffing and stuff). Neither market is regulated against the privileged players.
lmm 13y ago
What HFT provides is what other market users ask for; a limit order is essentially "I will pay 0.5 cents/share commission (thanks to the sub-penny rule) to the first person who can sell me shares in x at or below $y)". Since you asked for the first one, you must want it fast, right? Perhaps other order types could allow market participants to ask for something closer to what they actually want - but new order types are often criticized as giving HFT players an advantage, since they can understand and exploit them faster than other market participants. Alternately, eliminating the sub-penny rule would allow HFTs to compete on price rather than just latency, which would mean better prices for long-term investors and remove a lot of the profit from the HFT industry.
chollida1 13y ago
> I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. Well I guess I'm very biased but here's my stab at it. High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. You could argue that they help push these technologies forward by providing the first customer for these areas. Liquidity has gone up with the advent of High Frequency trading but like someone else has said its hard to disentangle all market factors to say this is due to HF Trading. > Something about it just doesn't ring true to me. If it is in fact true I'd love to hear an explanation. To be fair, this statement is the equivalent of "I've heard evolution is a well followed theory but something about it doesn't ring true to me." What sort of explanation would you like that hasn't already been said 100's of times by people more qualified than me? You haven't said what you don't like or disagree with about the many existing explanations:)
- lolcraft 13y ago
  High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. That's not an argument for HFT. If HFT is useless, then it has divested a great amount of research into technologies that no one really wanted otherwise, i. e., that the social cost of HFT is greater. Standard microeconomics. The question is, what's HFT good for? Do its benefits outweigh its costs? I believe they don't. Low-quality liquidity under the 1s frame is not only useless for traders, it has a great social cost, in the form of research diverted to this inane game. The only plausible arguments I've found for HFT claim that HF traders wouldn't profit if it wasn't useful -- which is really just begging the question; a circular argument.
  - AndrewBissell 13y ago
    What good, I ask you, has Reuter's telegram company done for the world? Aside from getting some information to a few London banks and trading houses, we've seen no other applications made of this infrastructure, and should therefore assume none will ever exist. -lolcraft, 1852
  - 13y ago
jrehor 13y ago
You are assuming that HFT profits come at the expense of investors. In fact, they were taken from insiders. I'm old enough to remember trading on US stock exchanges in the mid 1990s when prices where quoted in 1/8s and 1/16s and NYSE specialists were the only ones with visibility into order book. Think about it: you as an investor had no idea of the depth of the order book, but the specialist who took the other side of the trade from you had it in front of him. The specialists were minting money. They would lose money maybe one day per quarter, and their ROEs were ludicrous. HFT and ECN trading killed them. Labranche, Van der Moolen, Susquehanna, Spear Leeds, all gone. Goldman Sachs bought Spear Leeds for $6 billion in 2000 (it is now no more); Labranche specialist business fetched only $25m when it was sold to Barclays in 2010. Van der Moolen went bankrupt in 2010. Investment bank trading desks, true champions of customer front-running, are shrinking fast. Cash equity trading has become so tough for the banks that they are starting to think of it as a cost center, a loss leader to promote their equity underwriting business. These were multi-billion dollar businesses, with tens of thousands of middlemen living high on the hog from the spreads and front-running. They're all (mostly) gone. Good riddance. If you want to relive the old days of trading before HFT, go execute a large trade on Karachi Stock Exchange. Put the order in and watch in amazement. I would like to see the data showing total revenues of specialists, market makers, bank trading desks, brokerages, and HFT traders, over time. I would bet they have been going down for two decades. This is undeniably a good thing for investors.
- tanzam75 13y ago
  Tighter spreads were made possible by electronic exchanges, penny pricing, and direct access brokerages. You didn't need HFT for that. You could've gotten the same thing with LFT. If all you want is a penny spread, then nanoseconds don't matter.
RickHull 13y ago
> some old friends are in HFT and the one thing they all say, and I hear repeated everywhere, is that they provide liquidity to the market. More specifically, HFT acts like a market maker in that it will take the other side of trades that other players (HFT or not) want to make. Let's say I own 1000 shares of MSFT, but I need to liquidate them for some reason. A margin call, a new car, or some immediate, unexpected cost has arisen. The more potential counterparties I have -- the more players that will potentially buy my shares -- the more liquidity there is. With more liquidity, I can hold out for a higher price (with a cost in time), or I can sell more quickly (at a slightly lower price -- with a cost in money) than I could otherwise. Whether or not my HFT counterparty is executing profitable trades (which it is, presumably), the very fact of its existence as such is a net benefit to me.
- tanzam75 13y ago
  There is so much liquidity in MSFT that it'd trade at a penny spread with or without HFTs. Thus, the only advantage is speed. So you got your order filled in 5 milliseconds instead of 6 milliseconds. So what? You're a person. And stocks without enough liquidity to get to a penny spread? The HFTs don't like those stocks, because the "F" is not "H" enough for them to participate. The very nature of HFTs is that they prefer to participate when there is already plenty of liquidity.
  - RickHull 13y ago
    > There is so much liquidity in MSFT that it'd trade at a penny spread with or without HFTs. Thus, the only advantage is speed. You're talking to an unabashed proponent of subpenny increments. Smaller spreads, more counterparties, faster execution -- these things cannot possibly hurt. Note that I am talking about the concept of HFT. It's true that there are shady operators who abuse rules and undertake things like quote stuffing. I'm not here to defend any of that. > So you got your order filled in 5 milliseconds instead of 6 milliseconds. So what? You're a person. Still a net benefit even for just market orders. Limit orders benefit much more from HFT, particularly the stop-hunting variety. I think of the randomized price action as similar to quantum noise. No one really knows to the nth decimal what the price should be, but it wanders around where the money thinks it should be. So that noise can help trigger your limit trade at exactly the price you want, whereas the false placidity of more granular enforcement is less likely to hit your limit. Now let's look beyond just me and consider that some firms get more relative benefit from HFT than I do, and that these slivers of benefit sum across market participants. > And stocks without enough liquidity to get to a penny spread? The HFTs don't like those stocks, because the "F" is not "H" enough for them to participate. The very nature of HFTs is that they prefer to participate when there is already plenty of liquidity. Of course -- this should not be surprising in the least to anyone paying attention. The reason HFT practitioners participate is to attempt a profitable strategy. Liquidity is the side effect, not the goal. So while it's fair to say they provide liquidity to the market, or even that providing liquidity is the role they play, it's neither their duty nor their motivation. Similar to how commodities speculators provide counterparties for nervous farmers, they are guided by the invisible hand and not by duty.

kasey_junk 13y ago

Liquidity has certainly gone up. Also, it is hard to prove a causal relationship, but with the rise of electronic trading and HFT, price spreads and fees have come down. I can't prove it, but I believe that insider trading is also much less rampant in modern electronic systems than it was in the older pit based markets.

selmnoo 13y ago
The liquidity it provides is often very low quality. When liquidity in the old days was added, the players involved had to operate under stricter regulations -- they had to post a quote that was part of the National Best Bid and Offer a minimum percentage of time. With HFT it's a wild west scenario. There's a lot of uncertainty and risk of failure in many of its steps.
- sseveran 13y ago
  That is categorically incorrect. HFT firms like Getco are official market makers and have all the same responsibilities.
beagle3 13y ago
Re: spreads & fees: Price spreads and fees have come down as a result of electronic trading being open to everyone, and is probably independent of HFT (at least, modern HFT): E.g., The decreased spreads and fees were happening in europe in the early 2000s, when fastest updates were at 1/4 second, and slower updates were at 2 seconds. The nanosecond scale was not the reason for this. Re liquidity: it depends how you define liquidity. If you define it by "the average size at the bid or offer and next few price levels" or "volume traded", then yes - HFT has helped liquidity tremendously. If you define it as "the probability that a large order can complete", then liquidity has NOT gone up. With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty. If you need to execute a large order, you observe that you do not have the amazing liquidity everyone in HFT is talking about. Re insider trading: I wouldn't bet on it. With electronic trading, it's now easier to do insider trading slowly without attracting much attention. Furthermore, HFT has created new forms of fraud, so far unregulated: see e.g. http://www.nanex.net/aqck2/4329.html http://www.nanex.net/aqck2/4329.html
- AndrewBissell 13y ago
  > If you define it as "the probability that a large order can complete", then liquidity has NOT gone up. People seem to have this idea that back in the days of floor-based trading you could just call up the NYSE and say, "sell 1 million shares of Citigroup!" and the market makers would just kindly oblige you, without widening their spreads or trying to eke out a bigger gain from a transaction which inherently carries significant risk for them. It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. And as the large flow traders become more sophisticated and start to implement algos of their own, they'll get better at moving volume at a fairer average price. > With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty. I don't know about "often," unless you're talking about trading individual issues where news events introduce a high degree of uncertainty. There's really only been one case of a market-wide drying up of liquidity, which lasted for about 15 minutes during the flash crash. There's also nothing new about market-maker liquidity drying up in times of uncertainty or severe volatility. Plenty of stocks went "no bid" during the 1929 crash. Floor-based market makers are no more interested in standing in front of freight trains than algos are. If you're looking for someone/something to blame when markets crash and there are no bids to be found, focus on the Fed and its attempts to manipulate the credit cycle, which periodically fail in spectacular fashion.
  - tanzam75 13y ago
    > It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. Plenty of stocks went "no bid" during the 1929 crash. 1929 is an obsolete example. Heck, the SEC didn't even exist in 1929. A more relevant example is 1987 -- how many stocks went "no bid" on Black Monday? Here's how HFTs operate today. Bid furiously while the going is good. If you find yourself on the wrong side of a trade, you can always hit up the actual market-makers for a penny loss. And if the markets collapse, you pull out. What could be better? Supply liquidity when it's not needed, and stay out precisely when liquidity is most needed. Meanwhile, the registered market-makers are pulling back, or pulling out. And why not? They used to count on having the good times to balance out the bad. But now, the HFTs are siphoning off their profits during good times. Thus, the cross-subsidy has gone away. In periods of market stress, the HFTs go hide under a rock and don't participate in absorbing losses. The effect is: There are now fewer market-makers in periods of market stress. That's how HFTs have made things worse.
pedrocr 13y ago
I seem to recall that the research on this says that HFT is actually a net taker of liquidity and that their profits are fully funded (and then some) by other investors not really by making the market more efficient (they actually reduce efficiency). I've also heard stated many times that an exchange that only matches trades every X seconds would retain efficiency while eliminating HFT. This isn't the article I remember but goes into detail on most of these issues: http://www.demos.org/publication/cracks-pipeline-part-two-high-frequency-trading http://www.demos.org/publication/cracks-pipeline-part-two-hi...

Mikeb85 13y ago

They do provide liquidity. I can place a market order through my online broker, and have it execute in the time it takes my browser to refresh. This wasn't possible before HFT, and it allows retail investors to get much better trade execution.

beagle3 13y ago
Just to be clear, HFT these days mean microsecond round trip times between trading algorithms and exchanges. The situation you describe is thanks to electronic trading, and is also available in financial markets that are not dominated (not to say "infested") by HFT, such as currencies and CFDs.
- kasey_junk 13y ago
  There is no industry standard clear definition of HFT. That is part of the problem surrounding any discussion of it. People use the term to mean some mix of the following: - Trading is primarily algorithmic, computers making buy/sell decisions with minimal human intervention. - Trading is high volume with many low quantity orders with short (millisecond, second, minute) hold times. - Trading decisions happen at low latency currently in the sub-microsecond time frame. It is better to think of these as dials than as hard requirements. Some algorithmic decisions take a very long time to make decisions, other electronic trading systems hold positions for weeks or even months. I've seen very low latency systems that only trade a few times per day. Finally, your currency trading example is perfect. The reason HFT's are less involved in those markets is that they are known to be dominated by insider deals and old boy network cronyism. It is not a "fair" place to trade. If HFT were to come in that may or may not change. I suspect it would get better.
  - beagle3 13y ago
    I think HFT is now universally regarded as "faster than human reaction time", which means the slowest HFT has a <200ms "time constant". HFT stands for "High Frequency". That has not meant minutes since 2008 at least. > It is not a "fair" place to trade. If HFT were to come in that may or may not change. I suspect it would get better. "HFT" and "fair" in the same sentence, with positive connotation. Now, that's funny: HFT in American exchanges these days is an all out, unregulated war of bits, and fairness is not an attribute you can associate with it - see e.g. http://www.nanex.net/aqck2/4329.html http://www.nanex.net/aqck2/4329.html ; The reason HFT stays away from currency is not because of being "fair" or "unfair" (no markets are fair, every market has privileged players). It's just that in currencies, the people you take money from own the system and will kick you out. They make their own rules. Whereas on ARCA and INET, the HFTs are the landlords and make their own rules (by quote stuffing and stuff). Neither market is regulated against the privileged players.

lmm 13y ago

What HFT provides is what other market users ask for; a limit order is essentially "I will pay 0.5 cents/share commission (thanks to the sub-penny rule) to the first person who can sell me shares in x at or below $y)". Since you asked for the first one, you must want it fast, right? Perhaps other order types could allow market participants to ask for something closer to what they actually want - but new order types are often criticized as giving HFT players an advantage, since they can understand and exploit them faster than other market participants. Alternately, eliminating the sub-penny rule would allow HFTs to compete on price rather than just latency, which would mean better prices for long-term investors and remove a lot of the profit from the HFT industry.

chollida1 13y ago

> I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. Well I guess I'm very biased but here's my stab at it. High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. You could argue that they help push these technologies forward by providing the first customer for these areas. Liquidity has gone up with the advent of High Frequency trading but like someone else has said its hard to disentangle all market factors to say this is due to HF Trading. > Something about it just doesn't ring true to me. If it is in fact true I'd love to hear an explanation. To be fair, this statement is the equivalent of "I've heard evolution is a well followed theory but something about it doesn't ring true to me." What sort of explanation would you like that hasn't already been said 100's of times by people more qualified than me? You haven't said what you don't like or disagree with about the many existing explanations:)

lolcraft 13y ago
High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. That's not an argument for HFT. If HFT is useless, then it has divested a great amount of research into technologies that no one really wanted otherwise, i. e., that the social cost of HFT is greater. Standard microeconomics. The question is, what's HFT good for? Do its benefits outweigh its costs? I believe they don't. Low-quality liquidity under the 1s frame is not only useless for traders, it has a great social cost, in the form of research diverted to this inane game. The only plausible arguments I've found for HFT claim that HF traders wouldn't profit if it wasn't useful -- which is really just begging the question; a circular argument.
- AndrewBissell 13y ago
  What good, I ask you, has Reuter's telegram company done for the world? Aside from getting some information to a few London banks and trading houses, we've seen no other applications made of this infrastructure, and should therefore assume none will ever exist. -lolcraft, 1852
- 13y ago

jrehor 13y ago

You are assuming that HFT profits come at the expense of investors. In fact, they were taken from insiders. I'm old enough to remember trading on US stock exchanges in the mid 1990s when prices where quoted in 1/8s and 1/16s and NYSE specialists were the only ones with visibility into order book. Think about it: you as an investor had no idea of the depth of the order book, but the specialist who took the other side of the trade from you had it in front of him. The specialists were minting money. They would lose money maybe one day per quarter, and their ROEs were ludicrous. HFT and ECN trading killed them. Labranche, Van der Moolen, Susquehanna, Spear Leeds, all gone. Goldman Sachs bought Spear Leeds for $6 billion in 2000 (it is now no more); Labranche specialist business fetched only $25m when it was sold to Barclays in 2010. Van der Moolen went bankrupt in 2010. Investment bank trading desks, true champions of customer front-running, are shrinking fast. Cash equity trading has become so tough for the banks that they are starting to think of it as a cost center, a loss leader to promote their equity underwriting business. These were multi-billion dollar businesses, with tens of thousands of middlemen living high on the hog from the spreads and front-running. They're all (mostly) gone. Good riddance. If you want to relive the old days of trading before HFT, go execute a large trade on Karachi Stock Exchange. Put the order in and watch in amazement. I would like to see the data showing total revenues of specialists, market makers, bank trading desks, brokerages, and HFT traders, over time. I would bet they have been going down for two decades. This is undeniably a good thing for investors.

tanzam75 13y ago
Tighter spreads were made possible by electronic exchanges, penny pricing, and direct access brokerages. You didn't need HFT for that. You could've gotten the same thing with LFT. If all you want is a penny spread, then nanoseconds don't matter.

RickHull 13y ago

> some old friends are in HFT and the one thing they all say, and I hear repeated everywhere, is that they provide liquidity to the market. More specifically, HFT acts like a market maker in that it will take the other side of trades that other players (HFT or not) want to make. Let's say I own 1000 shares of MSFT, but I need to liquidate them for some reason. A margin call, a new car, or some immediate, unexpected cost has arisen. The more potential counterparties I have -- the more players that will potentially buy my shares -- the more liquidity there is. With more liquidity, I can hold out for a higher price (with a cost in time), or I can sell more quickly (at a slightly lower price -- with a cost in money) than I could otherwise. Whether or not my HFT counterparty is executing profitable trades (which it is, presumably), the very fact of its existence as such is a net benefit to me.

tanzam75 13y ago
There is so much liquidity in MSFT that it'd trade at a penny spread with or without HFTs. Thus, the only advantage is speed. So you got your order filled in 5 milliseconds instead of 6 milliseconds. So what? You're a person. And stocks without enough liquidity to get to a penny spread? The HFTs don't like those stocks, because the "F" is not "H" enough for them to participate. The very nature of HFTs is that they prefer to participate when there is already plenty of liquidity.
- RickHull 13y ago
  > There is so much liquidity in MSFT that it'd trade at a penny spread with or without HFTs. Thus, the only advantage is speed. You're talking to an unabashed proponent of subpenny increments. Smaller spreads, more counterparties, faster execution -- these things cannot possibly hurt. Note that I am talking about the concept of HFT. It's true that there are shady operators who abuse rules and undertake things like quote stuffing. I'm not here to defend any of that. > So you got your order filled in 5 milliseconds instead of 6 milliseconds. So what? You're a person. Still a net benefit even for just market orders. Limit orders benefit much more from HFT, particularly the stop-hunting variety. I think of the randomized price action as similar to quantum noise. No one really knows to the nth decimal what the price should be, but it wanders around where the money thinks it should be. So that noise can help trigger your limit trade at exactly the price you want, whereas the false placidity of more granular enforcement is less likely to hit your limit. Now let's look beyond just me and consider that some firms get more relative benefit from HFT than I do, and that these slivers of benefit sum across market participants. > And stocks without enough liquidity to get to a penny spread? The HFTs don't like those stocks, because the "F" is not "H" enough for them to participate. The very nature of HFTs is that they prefer to participate when there is already plenty of liquidity. Of course -- this should not be surprising in the least to anyone paying attention. The reason HFT practitioners participate is to attempt a profitable strategy. Liquidity is the side effect, not the goal. So while it's fair to say they provide liquidity to the market, or even that providing liquidity is the role they play, it's neither their duty nor their motivation. Similar to how commodities speculators provide counterparties for nervous farmers, they are guided by the invisible hand and not by duty.