4 ms·

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.

by 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

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.