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I'm always told that HFT makes the bid/ask spread go from 0.25 to 0.01. I'm always told this is a good thing... But why is that? Let's say we didn't have HFT a
by williamcotton 13y ago
I'm always told that HFT makes the bid/ask spread go from 0.25 to 0.01. I'm always told this is a good thing... But why is that?
Let's say we didn't have HFT and we had a larger spread... That means that one of the parties is overpaying, right?
But, aside from the burdens of the individual overpayer, doesn't it make more sense for the overall ecosystem to at least keep that money in the pockets of people who are interested in the long term value of the equity?
What are the overall economic marginal returns on squeezing the spread so thin? Is it possible that it might make more macroeconomic sense to NOT have some other entity profiting off of having created a minutely more liquid marketplace?
- strongvigilance 13y agoThere have always been middlemen, as, especially with less liquid instruments, there won't necessarily be equal supply and demand from "natural" buyers and sellers. As markets have gone from floor trading, to point+click on computer screens, to automation of different levels of sophistication, efficiency has improved - people complain about HFT stealing pennies, but in the past, someone was stealing quarters. The difference is that the skills required have changed tremendously - a few years ago, it was all about being well connected or going to the right school - now it's all about how good your code is. It's not particularly surprising that the loudest anti-HFT voices are guys whose profit margins have been killed by it. Disclosure: my profit margins have been killed by HFT...
- tptacek 13y agoThe spread is a fee charged by liquidity providers (market makers) to traders. Whether you trade every day or only once a year, the spread is effectively money taken from the trader and put in the pockets of market-makers. If you want to disincentivize active trading (more than the market already does, by awarding outsized returns to funds that don't rely on active trading), a tax on trades performs this function more effectively than high spreads do. Worth noting: during the times when spreads were as high as 0.25, that was in large part the result of collusion between the market makers, who were eventually taken to court over it.
- williamcotton 13y agoAll of these responses only mention market makers and traders. What about the issuers and retail investors? Like, you know, the reason we have this stuff to begin with and the reason we all let our money in to these markets in the first place? Why should I put my money in to such a horribly complex system instead of looking for more direct methods of investing my money? The overhead doesn't seem worth it, but what am I missing?
- tptacek 13y agoBuy-and-hold investors are a subset of traders, for the purposes of my comment. Mentally substitute the two terms in my comment and you'll see that it remains true.
- williamcotton 13y agoI'm not sure how that answers my questions related to why I should trust a marketplace that allows HFT over one that disallows them.
- tptacek 13y agoI don't think you've actually asked that question. If you'd like, try restating it, and I'll try to answer it more directly in terms of HFT.
- williamcotton 13y agoSorry, I'm on a few threads here trying to figure this stuff out. Basically, what I want to know is, how does this reduce the spread between some dude trying to sell shares in his venture and some dude wishing to invest his money? I get the role of a market maker in this situation. But what does HFT do to somehow make the two parties willing to either sell for less or buy for more?
- 13y ago