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I don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expen

by josho 13y ago

I don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expense of adding a tax on many of the transactions. Except this tax does nothing else to help the markets except to further feed the beast (profits) of companies running HFT. So the real question to ask is: does a marginal increase in liquidity outweigh the financial cost? I'd argue that it is a tax on society with no real benefit. I've started to hear about auction's to improve the markets which is interesting and saves us from the millions (billions?) of dollars that HFTs pocket for themselves. [1] http://quant.stackexchange.com/questions/1658/has-high-frequency-trading-hft-been-a-net-benefit-or-cost-to-society http://quant.stackexchange.com/questions/1658/has-high-frequ...

kasey_junk 13y ago
It's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.
- josho 13y ago
  Genuine question, how does it decrease the spread? Let's simplify this: I have a stock to sell, I'm asking $100, you want to buy and offer $95. How does a HFT decrease the spread while keeping a portion of the transaction itself as profit?
  - kasey_junk 13y ago
    We need to introduce 2 new players. Sally who has some of this stock that she needs to sell for as much as she can get and Bob who wants to buy some of this stock for as little as he has to pay. In the current market Sally gets $95 per share and Bob has to pay $100. Matt looks at the bid ask spread and decides it would be profitable to make a market in that stock. So he simultaneously asks at $99.99 and bids at $95.01. If Sally and Bob were to come back now they each would get a better deal and Matt would make $4.98 on the deal. For Matt to continue doing this that $4.98 needs to cover the risks he is taking, his operational costs, and some profit. An HFT is much more efficient at this than Matt driving down the operational cost & potentially calculating the risk more accurately.
harryh 13y ago
HFT decreases the bid ask spread by replacing expensive human traders with relatively cheap computers. It's automation.
- josephlord 13y ago
  HFT implies computers but computers do not imply HFT. You could automate the trading platform and give everyone equal access without it becoming a hardware arms race.
  - harryh 13y ago
    Sure, and I could program using a 386, but why would it be a good idea to limit programmers to old technology?
sambe 13y ago
Which tax is it adding? You enter a limit order at a price, and you get filled at that price: that is true with or without HFT. With HFT, the spread is tighter, so either crossing or stepping inside makes your trade more efficient.
- josho 13y ago
  Perhaps my understanding of HFT is not complete. As I understand the HFT steps in between you and I and buys/sells the asset acting as a third party. When it does this it keeps part of the spread for itself--that's the tax I am referring to, profit for the HFT that as far as I understand serves no value.
  - sambe 13y ago
    No, that role is generally performed by the broker/bank (who don't like HFT, in general). I'm not sure I see anything wrong with that either though. It is quite normal to take a spread in any industry - an orange seller steps between you and the farmer, for example. I would argue your broker does a lot less for you than a farmer, or high frequency market maker. HFT is generally known to shrink the spread, making trading cheaper for you than it would be without them. They still take a profit, because they take a risk. I'd recommend reading a little about market structure - and preferably not from those with a narrative to sell.

by josho 13y ago

kasey_junk 13y ago

It's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.

josho 13y ago
Genuine question, how does it decrease the spread? Let's simplify this: I have a stock to sell, I'm asking $100, you want to buy and offer $95. How does a HFT decrease the spread while keeping a portion of the transaction itself as profit?
- kasey_junk 13y ago
  We need to introduce 2 new players. Sally who has some of this stock that she needs to sell for as much as she can get and Bob who wants to buy some of this stock for as little as he has to pay. In the current market Sally gets $95 per share and Bob has to pay $100. Matt looks at the bid ask spread and decides it would be profitable to make a market in that stock. So he simultaneously asks at $99.99 and bids at $95.01. If Sally and Bob were to come back now they each would get a better deal and Matt would make $4.98 on the deal. For Matt to continue doing this that $4.98 needs to cover the risks he is taking, his operational costs, and some profit. An HFT is much more efficient at this than Matt driving down the operational cost & potentially calculating the risk more accurately.

harryh 13y ago

HFT decreases the bid ask spread by replacing expensive human traders with relatively cheap computers. It's automation.

josephlord 13y ago
HFT implies computers but computers do not imply HFT. You could automate the trading platform and give everyone equal access without it becoming a hardware arms race.
- harryh 13y ago
  Sure, and I could program using a 386, but why would it be a good idea to limit programmers to old technology?

sambe 13y ago

Which tax is it adding? You enter a limit order at a price, and you get filled at that price: that is true with or without HFT. With HFT, the spread is tighter, so either crossing or stepping inside makes your trade more efficient.

josho 13y ago
Perhaps my understanding of HFT is not complete. As I understand the HFT steps in between you and I and buys/sells the asset acting as a third party. When it does this it keeps part of the spread for itself--that's the tax I am referring to, profit for the HFT that as far as I understand serves no value.
- sambe 13y ago
  No, that role is generally performed by the broker/bank (who don't like HFT, in general). I'm not sure I see anything wrong with that either though. It is quite normal to take a spread in any industry - an orange seller steps between you and the farmer, for example. I would argue your broker does a lot less for you than a farmer, or high frequency market maker. HFT is generally known to shrink the spread, making trading cheaper for you than it would be without them. They still take a profit, because they take a risk. I'd recommend reading a little about market structure - and preferably not from those with a narrative to sell.