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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

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.
    - hft_throwaway 13y ago
      We don't need much more than safe shelter and a shirt on our backs. We could get by with once a day call auctions or even trading stocks face-to-face without an exchange at all. We don't even need stocks or companies. That doesn't mean intermediation in real-time markets isn't valuable. Say you have a car and want to sell it to buy your future wife an engagement ring. You could take it to CarMax and sell it instantly, or spend your time researching a fair price, posting up ads, cleaning it up for sale, meeting with potential buyers, etc. CarMax has all sorts of "unfair" advantages: they've developed superior pricing models, they have access to historical auction data you may not be able to get, they can sell their inventory in the inter-dealer auction market, they've invested heavily in their own sales force to resell the car, through economies of scale they can hire their own detailers and mechanics to fix the cars up at a lower price, etc. CarMax is clearly superior to you at the "reselling used cars" game, though all the advantages they have are things any competitor could choose to purchase. They make money doing this, but people still choose to deal with them because it's a net benefit to be able to sell your car instantly. Some people prefer to sell their car to CarMax, others try their hand at doing it themselves, and through their patience they may save a bit of money. Likewise you can do the same in the financial markets. You can work your own limit orders to enter or exit positions or trade in the opening/closing call auctions on each exchange, but many traders prefer to trade instantly with quotes placed by a market maker. Being able to liquidate your stock holdings to spend the money on something else instantly is valuable to some people, and they pay for it through the bid-ask spread. You're basically saying people want the wrong things.
      - ThomPete 13y ago
        no i am basically asking whether anyone besides the people doing HFT benefits from it. If they do then it should be easy to point to the positive consequences of HFT in society and a lot more people would back it up. If its only beneficial as a scheme to get money out of the stockmarket then many people are naturally going to be against it. Claiming i am on the wrong side of what people want seem to be a tad ignorant of reality, dont you think

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.
  - hft_throwaway 13y ago
    We don't need much more than safe shelter and a shirt on our backs. We could get by with once a day call auctions or even trading stocks face-to-face without an exchange at all. We don't even need stocks or companies. That doesn't mean intermediation in real-time markets isn't valuable. Say you have a car and want to sell it to buy your future wife an engagement ring. You could take it to CarMax and sell it instantly, or spend your time researching a fair price, posting up ads, cleaning it up for sale, meeting with potential buyers, etc. CarMax has all sorts of "unfair" advantages: they've developed superior pricing models, they have access to historical auction data you may not be able to get, they can sell their inventory in the inter-dealer auction market, they've invested heavily in their own sales force to resell the car, through economies of scale they can hire their own detailers and mechanics to fix the cars up at a lower price, etc. CarMax is clearly superior to you at the "reselling used cars" game, though all the advantages they have are things any competitor could choose to purchase. They make money doing this, but people still choose to deal with them because it's a net benefit to be able to sell your car instantly. Some people prefer to sell their car to CarMax, others try their hand at doing it themselves, and through their patience they may save a bit of money. Likewise you can do the same in the financial markets. You can work your own limit orders to enter or exit positions or trade in the opening/closing call auctions on each exchange, but many traders prefer to trade instantly with quotes placed by a market maker. Being able to liquidate your stock holdings to spend the money on something else instantly is valuable to some people, and they pay for it through the bid-ask spread. You're basically saying people want the wrong things.
    - ThomPete 13y ago
      no i am basically asking whether anyone besides the people doing HFT benefits from it. If they do then it should be easy to point to the positive consequences of HFT in society and a lot more people would back it up. If its only beneficial as a scheme to get money out of the stockmarket then many people are naturally going to be against it. Claiming i am on the wrong side of what people want seem to be a tad ignorant of reality, dont you think