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I hear that often. If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This last quarter I may have bought/sold

by ajays 13y ago

I hear that often. If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This last quarter I may have bought/sold on the order of 10K shares max. If there's a $0.0001 tax per share traded, it would've cost me $1. That's ambient noise level.

mdkess 13y ago
That would only be true if you had to pay the tax and nobody else did. Assuming the result of the tax is less liquidity, higher volatility and bigger spreads, it could cost you quite a bit more.
kasey_junk 13y ago
Not all of them are making money. Most of the money is just being shuffled around between various firms. At any given time you can find an HFT firm making money and another one blowing up.
twoodfin 13y ago
If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This sounds like an odd question if you transpose it to any other market where automated systems have lowered costs: "If Amazon is indeed lowering the cost of buying books, how come they are making the money and not the consumer?" "If Expedia is indeed lowering the cost of booking a plane ticket, how come they are making money and not the traveler?" "If Toyota is indeed lowering the cost of manufacturing a car, how come they are making the money and not the auto buyer?" Retail traders benefit from the cheaper trades facilitated by high liquidity in automated trading. There wouldn't be anywhere near as high liquidity in many of these stocks if there weren't automated systems trying to make money on penny price shifts.
- tedunangst 13y ago
  That's a great point about Amazon. In fact, Amazon is playing the role of both exchange and market maker. Can you imagine the shitstorm of comments if a stock exchange tried that?
radikalus 13y ago
It's not only about bid-ask spreads; I find this a gross oversimplification of what HFTs bring the market. Other things: - Prices around the world across all exchanges are kept in line. If you need to hedge your Yen exposure and can only trade in Europe, you will get the closest possible price as someone in Asia or the US. This is true across all asset classes. This lack of massive arbitrage may get a lot of investors/hedgers/speculators significantly better prices. - Derivatives on almost any asset are similarly tight as their underlying assets. No longer are you crossing wide/illiquid markets to hedge back month products or options. In a lot of markets, you can trade tight/liquid markets at almost any tenure; this is potentially a LARGE cost savings particularly compared to what some of the markets looked like a decade ago. - Stat Arb + Relative value spreads are kept in line with their variance structures. Stocks move in line with their eigen components, options move smoothly with their volatility structures, futures at various tenures are priced in line with their synthetic interest rate exposure. Without being able to accurately price something, most participants are able to get a 'good' price on almost anything. While a lot of the HFT is indeed zero sum between firms, the net economic effect of their activity is certainly not. The amount of $ that most firms make from the HFT business is really not that large; most of the big trading firms have made their fortunes from large speculative/fortunate events, not from being the best at constantly collecting a 1/10th of a tick of edge over and over.

by ajays 13y ago

mdkess 13y ago

That would only be true if you had to pay the tax and nobody else did. Assuming the result of the tax is less liquidity, higher volatility and bigger spreads, it could cost you quite a bit more.

kasey_junk 13y ago

Not all of them are making money. Most of the money is just being shuffled around between various firms. At any given time you can find an HFT firm making money and another one blowing up.

twoodfin 13y ago

If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This sounds like an odd question if you transpose it to any other market where automated systems have lowered costs: "If Amazon is indeed lowering the cost of buying books, how come they are making the money and not the consumer?" "If Expedia is indeed lowering the cost of booking a plane ticket, how come they are making money and not the traveler?" "If Toyota is indeed lowering the cost of manufacturing a car, how come they are making the money and not the auto buyer?" Retail traders benefit from the cheaper trades facilitated by high liquidity in automated trading. There wouldn't be anywhere near as high liquidity in many of these stocks if there weren't automated systems trying to make money on penny price shifts.

tedunangst 13y ago
That's a great point about Amazon. In fact, Amazon is playing the role of both exchange and market maker. Can you imagine the shitstorm of comments if a stock exchange tried that?

radikalus 13y ago

It's not only about bid-ask spreads; I find this a gross oversimplification of what HFTs bring the market. Other things: - Prices around the world across all exchanges are kept in line. If you need to hedge your Yen exposure and can only trade in Europe, you will get the closest possible price as someone in Asia or the US. This is true across all asset classes. This lack of massive arbitrage may get a lot of investors/hedgers/speculators significantly better prices. - Derivatives on almost any asset are similarly tight as their underlying assets. No longer are you crossing wide/illiquid markets to hedge back month products or options. In a lot of markets, you can trade tight/liquid markets at almost any tenure; this is potentially a LARGE cost savings particularly compared to what some of the markets looked like a decade ago. - Stat Arb + Relative value spreads are kept in line with their variance structures. Stocks move in line with their eigen components, options move smoothly with their volatility structures, futures at various tenures are priced in line with their synthetic interest rate exposure. Without being able to accurately price something, most participants are able to get a 'good' price on almost anything. While a lot of the HFT is indeed zero sum between firms, the net economic effect of their activity is certainly not. The amount of $ that most firms make from the HFT business is really not that large; most of the big trading firms have made their fortunes from large speculative/fortunate events, not from being the best at constantly collecting a 1/10th of a tick of edge over and over.