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There are not many businesses you can start that cost so little. Even a McDonalds franchise would cost more to start than a small trading firm. The activity he

There are not many businesses you can start that cost so little. Even a McDonalds franchise would cost more to start than a small trading firm. The activity he describes is illegal. Every order you place must be because of a bona fide interest to trade at that time, and not as an attempt to induce others to act or gather information. If I could get filled on every bid and offer I have in the market I'd be very happy. That's basically what happened to the MMs on the other side of the Knight debacle. HFT moves liquidity across time, place, and product. It drives down spreads by intermediating trades for a lower cost than human market makers had to charge. The market would not crash if HFT went away, but markets would become less efficient, more trades would go off away from fair values since nobody could correct small-scale mispricings, spreads to customers who immediately want to buy and sell would increase, and short-term volatility would go up since nobody would buffer transient pricing errors. It'd be like if all the grocery stores around you folded and you had to trek up to the meat market and buy things in bulk. It would be very inconvenient and expensive, but not the end of the world.

ThomPete 13y ago
In the digital space there is. Comparing it to a McDonalds franchise make little sense IMO both in terms of what the investment is used for and the returns you stand to gain. With regards to the inconvenience and price of not having HFT around. That again sounds like an issue for the traders not for the companies the stockmarket is supposed to help.
- hft_throwaway 13y ago
  The returns aren't that high though. Even the top firms now barely make anything after costs. The stock market is designed for traders! The primary purpose of a stock market is to let stockholders transfer risk most efficiently. The capital raising was done when the company issued shares. People buying stocks are not investing.
  - ThomPete 13y ago
    But then we are back to the original question. What value does it provide then? You claimed that it would be much more expensive if HFT wasn't around. So surely HFT should be able to reap the benefits of what they save no?
    - hft_throwaway 13y ago
      Not in a competitive market, and on-exchange liquidity provision is the most purely competitive market out there. My quote is no better than anyone else's, so anyone can undercut my price. Imagine the grocery store example I gave. Say meat costs $5/lb wholesale and your transportation costs to drive to the meat market in a car are $1.50. A grocery store using a truck to pick up the meat and freeze it in their store can transport the meat for $0.50. In a non-competitive market, they would charge you $6.49 for the meat, and you'd prefer to buy it there since it's less than your alternative of paying $6.50. However, if there are two grocery stores across from one another, they can compete on price to win your business, and the price of meat will end up being marginally above the costs of whoever can transport/store meat the cheapest, maybe $5.55 or something. The end consumer captures most of the surplus value. The same thing happens in trading. Professional traders are more skilled at managing positions and trading across markets. By electing to trade with a market-maker's quote, you are effectively giving them your trading problem. Unlike the grocery store example where only a handful of businesses may compete, there are dozens of firms engaged in automated trading all competing for your business by offering tighter prices. They'll continue to do this as long as it's profitable, but competition will erode their profit margins until they're slightly above costs. HFTs made a killing when they had first-mover advantage, just like if you were the first company to use smart logistics software or any other innovation. Now, not so much.
      - ThomPete 13y ago
        thats still not showing transcendence. How does HFT help the grocery store, the startup, the autocar dealer, amazon, mictosoft etc. you only showed inner market workings not why we as a society need it.

ThomPete 13y ago

In the digital space there is. Comparing it to a McDonalds franchise make little sense IMO both in terms of what the investment is used for and the returns you stand to gain. With regards to the inconvenience and price of not having HFT around. That again sounds like an issue for the traders not for the companies the stockmarket is supposed to help.

hft_throwaway 13y ago
The returns aren't that high though. Even the top firms now barely make anything after costs. The stock market is designed for traders! The primary purpose of a stock market is to let stockholders transfer risk most efficiently. The capital raising was done when the company issued shares. People buying stocks are not investing.
- ThomPete 13y ago
  But then we are back to the original question. What value does it provide then? You claimed that it would be much more expensive if HFT wasn't around. So surely HFT should be able to reap the benefits of what they save no?
  - hft_throwaway 13y ago
    Not in a competitive market, and on-exchange liquidity provision is the most purely competitive market out there. My quote is no better than anyone else's, so anyone can undercut my price. Imagine the grocery store example I gave. Say meat costs $5/lb wholesale and your transportation costs to drive to the meat market in a car are $1.50. A grocery store using a truck to pick up the meat and freeze it in their store can transport the meat for $0.50. In a non-competitive market, they would charge you $6.49 for the meat, and you'd prefer to buy it there since it's less than your alternative of paying $6.50. However, if there are two grocery stores across from one another, they can compete on price to win your business, and the price of meat will end up being marginally above the costs of whoever can transport/store meat the cheapest, maybe $5.55 or something. The end consumer captures most of the surplus value. The same thing happens in trading. Professional traders are more skilled at managing positions and trading across markets. By electing to trade with a market-maker's quote, you are effectively giving them your trading problem. Unlike the grocery store example where only a handful of businesses may compete, there are dozens of firms engaged in automated trading all competing for your business by offering tighter prices. They'll continue to do this as long as it's profitable, but competition will erode their profit margins until they're slightly above costs. HFTs made a killing when they had first-mover advantage, just like if you were the first company to use smart logistics software or any other innovation. Now, not so much.
    - ThomPete 13y ago
      thats still not showing transcendence. How does HFT help the grocery store, the startup, the autocar dealer, amazon, mictosoft etc. you only showed inner market workings not why we as a society need it.