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Huh? The fundraiser would get money at the price at the lower end of the spread, and the investor would buy at the upper end, so your question is nonsensical.

by yxhuvud 13y ago

Huh? The fundraiser would get money at the price at the lower end of the spread, and the investor would buy at the upper end, so your question is nonsensical. The difference is what the market maker takes for providing liquidity (in exchange for providing money now and for taking a risk that the price may change out of the spread range). Spread == price of liquidity.

williamcotton 13y ago
What I'm asking is, how does HFT lower the spread? The spread is just the difference between what one person is willing to sell and another willing to buy. If it's Monday and I'm trying to raise money for a venture by selling shares at a certain price, and some other dude has extra money laying around but wants to buy it for less, that's the spread, right? I either sell for less directly to the retail investor or a market maker happens to come in to the picture and I happily get to sell to him at the price I wanted to. He thinks my price will go up by Friday and that these other dudes will definitely be willing to pay more for the shares that he did by then. At which point he will profit, right? But that never changed what I was willing to sell and some dude was unwilling to buy at on a Monday. How does HFT affect all of this?
- yxhuvud 13y ago
  HFT lower the spread by being a lot better and more competetive at what they do compared to what stock brokers and day traders used to be, in the bad old days. Not really. The spread is the difference between the lowest market sell price, and the highest buy price. What the market maker (be it a HFT or a human) provides is the ability to sell and get money immediately. If you have the patience to wait (and can afford to take the risk that the market moves in a direction that is not good for you), then you can put a sell order at a specified price. At that point, you are a market maker. However, most people don't trade like that. Instead, they put a buy (or sell) order at market price, at which point the exchange will match the current orders in a way that is as favourable as possible to the guy that placed the order. The affect of the market maker is that the seller and buyer don't have to be active at the same time, or even in the same exchange. The spread is simply the price the market maker takes for arranging this. Less spread is the same as less cut for middlemen.
  - tptacek 13y ago
    Two things. First, resting a limit order on the book makes you a liquidity provider, but not a market maker. Market makers are consistently willing to buy or sell, regardless of where prices are; they are long-term neutral with respect to the instruments they trade. They're able to trade constantly without losing their shirts because (a) they deliberately avoid holding a long-term position in what they're trading and (b) they are constantly adjusting their prices to stay in the middle of the "true" bid-ask prices. It's easy to see that entering a single limit order doesn't make you a market maker; you're willing to trade only if prices match your preferred valuation, which means you have a long-term long or short position for that instrument. Second, "most" retail investors do enter market orders (orders fulfilled immediately that cross the spread, buying at the best ask price or selling at the best bid price). But sophisticated investors do not do that. Market orders charge a premium for the liquidity they demand, and so sophisticated traders use different order types.

by yxhuvud 13y ago

williamcotton 13y ago

What I'm asking is, how does HFT lower the spread? The spread is just the difference between what one person is willing to sell and another willing to buy. If it's Monday and I'm trying to raise money for a venture by selling shares at a certain price, and some other dude has extra money laying around but wants to buy it for less, that's the spread, right? I either sell for less directly to the retail investor or a market maker happens to come in to the picture and I happily get to sell to him at the price I wanted to. He thinks my price will go up by Friday and that these other dudes will definitely be willing to pay more for the shares that he did by then. At which point he will profit, right? But that never changed what I was willing to sell and some dude was unwilling to buy at on a Monday. How does HFT affect all of this?

yxhuvud 13y ago
HFT lower the spread by being a lot better and more competetive at what they do compared to what stock brokers and day traders used to be, in the bad old days. Not really. The spread is the difference between the lowest market sell price, and the highest buy price. What the market maker (be it a HFT or a human) provides is the ability to sell and get money immediately. If you have the patience to wait (and can afford to take the risk that the market moves in a direction that is not good for you), then you can put a sell order at a specified price. At that point, you are a market maker. However, most people don't trade like that. Instead, they put a buy (or sell) order at market price, at which point the exchange will match the current orders in a way that is as favourable as possible to the guy that placed the order. The affect of the market maker is that the seller and buyer don't have to be active at the same time, or even in the same exchange. The spread is simply the price the market maker takes for arranging this. Less spread is the same as less cut for middlemen.
- tptacek 13y ago
  Two things. First, resting a limit order on the book makes you a liquidity provider, but not a market maker. Market makers are consistently willing to buy or sell, regardless of where prices are; they are long-term neutral with respect to the instruments they trade. They're able to trade constantly without losing their shirts because (a) they deliberately avoid holding a long-term position in what they're trading and (b) they are constantly adjusting their prices to stay in the middle of the "true" bid-ask prices. It's easy to see that entering a single limit order doesn't make you a market maker; you're willing to trade only if prices match your preferred valuation, which means you have a long-term long or short position for that instrument. Second, "most" retail investors do enter market orders (orders fulfilled immediately that cross the spread, buying at the best ask price or selling at the best bid price). But sophisticated investors do not do that. Market orders charge a premium for the liquidity they demand, and so sophisticated traders use different order types.