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I really hate to go down this road because it's been rehashed thousands of times on Hacker News, but high frequency traders add value to the market by adding li
by vecter 13y ago
I really hate to go down this road because it's been rehashed thousands of times on Hacker News, but high frequency traders add value to the market by adding liquidity (and therefore reducing spreads --> cost to you for executing) and price discovery.
- mistercow 13y agoIn theory. The debate is about whether that extra liquidity is actually of any practical use.
- confluence 13y agoHFT does not add liquidity, but they do squeeze spreads in liquid contracts. It's some what good for retail, but terrible for institutional investors, which hurt retail on the backend. HFT is just a front running operation in those cases.
- nandemo 13y agoWhat is that definition of adding liquidity that doesn't include "tightening the spread"?
- confluence 13y agoJust because you lowered my home loan fees while the sun shone, doesn't mean that you'll be there when winter comes and the shit hits the fan. Liquidity is always there. Until it ain't.
- andylei 13y agowhat's the alternative? are specialists offering liquidity in markets that HFTs aren't?
- im3w1l 13y agoSomething about being able to buy a decently sized portion without moving the price to much.
- sumedh 13y agoThis liquidity argument is rehashed thousand times but did you know that most of the orders made by HFT's end up getting cancelled. Regulators found HFT's exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines. Regulators determined that high frequency traders sold aggressively to eliminate their positions and withdrew from the markets in the face of uncertainty. http://en.wikipedia.org/wiki/2010_Flash_Crash http://en.wikipedia.org/wiki/2010_Flash_Crash Berkshire Hathaway has a difference of 1000 dollars for its bid ask spread yet you dont see a lot of people complaining, do you?
- snake_plissken 13y ago>that most of the orders made by HFT's end up getting cancelled. Thank you. That is all that needs to be said.
- yardie 13y agoI hear this argument made all the time and maybe it is true at the microlevel. On a macrolevel it appears price discovery is one algorithm's "opinion" is matched against hundreds of other algorithms' opinions and they all tend to go in the same direction.
- jonknee 13y agoSort of. If you are buying or selling a lot of shares it's quite a bit more expensive. That probably doesn't matter to you or I if we are buying AAPL because it's a small number of shares, but it does hurt any index/mutual funds you're invested in. Norway's sovereign wealth fund (one of the largest in the world, they own 1% of all US stocks) just came out on this exact topic: http://www.efinancialnews.com/story/2013-09-17/norways-sovereign-wealth-fund-high-frequency-traders?ea9c8a2de0ee111045601ab04d673622#.UjhWQFEEQ0o.twitter http://www.efinancialnews.com/story/2013-09-17/norways-sover... > Next, the paper takes on HFT's usual defence – that they provide the market with much-increased liquidity. Norges Bank worries that this liquidity is "transient" - i.e. HFTs often place large orders only to then cancel them, creating "phantom" liquidity and leaving "buyside traders fac[ing] new challenges in assessing posted liquidity."
- harryh 13y agoSo what happens is Norway's sovereign wealth fund wants to buy a kagillion shares of MSFT (or whatever). In the good old days they could probably complete this transaction before the price went up too much. Now, thanks to HFTs, this additional demand is noticed faster, the prices rises faster, and it costs Norway more money. So, bummer for them. But great for you! Because maybe you're the guy selling MSFT shares to them. You get the benefit of the price rising faster. The market is more efficient. Norway can no longer take advantage of the fact that it knows that there's all this additional demand (originating from itself) and it takes a while for everyone else to figure that out.
- fr0sty 13y agoPlease supply values for the following undefined variables: 1. kagillion (shares, %ADV, notional dollars) 2. good old days (single year or a range) 3. too much (in $ or %)
- harryh 13y ago1. Hrm, ok. So apparently it's a 770B fund. Let's say they want to move .01% of their assets into MSFT. That would be $77M or about 2.2M shares. That would be about 5% of the average daily volume of MSFT. 2. It's not a binary thing but a gradual transition from mostly human market makers in the 80s to mostly algorithmic market makers today. 3. I'm on shakier ground on this one, but a fraction of a % of their cost.
- ansible 13y agoI really hate to go down this road because it's been rehashed thousands of times on Hacker News... And I've yet to see a convincing argument that HFT is of any benefit to anyone else other than themselves. At the most basic level, HFT firms make money, right? Otherwise they wouldn't be doing this. Where does this money come from? Entities that are holding these same stocks for longer periods of time. It increases the costs to the longer-term buyers, and it decreases profits to the long-term sellers. HFT is sand in the gears of the economy, not lubricating oil like they would have you believe.
- kylebrown 13y agoHFT profits come from the money that the specialists/dealers used to make. They were the guys standing at the podiums quoting bid/ask prices all day.
- sergiosgc 13y agoIf that were true, then removing HFT would bring back floor dealers. Clearly, it is false. Electronic trading, not HFT, deprecated floor tradrs.