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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
by 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 agoWe 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.