7 ms·

The people who need the liquidity are the people who willingly take the liquidity. Do you think someone puts a gun to their head and forces them to submit a ma

by gd1 12y ago

The people who need the liquidity are the people who willingly take the liquidity. Do you think someone puts a gun to their head and forces them to submit a market order? It's a little bit like saying the guy who runs your 7-11 is a scumbag because he charges an extra 50c for a carton of milk, and "who needs that liquidity, they could just wait until <insert large supermarket chain> opens and get their milk there". Sure, but they might want the milk now. And no one forces them to get it from the 7-11. It's a free market.

UweSchmidt 12y ago
I understand that currently the game is played with high liquidity. The alternative I'd like you to consider would consist of "real" investors with no need for split second decisions and liquidity. Give it a thought. The 7-11 provides the trade functions "assortment of goods" and "transport" and as such is valuable. The analogy to HFT does not hold.
- gd1 12y ago
  >The 7-11 provides the trade functions "assortment of goods" and "transport" and as such is valuable. "Large supermarket chain" also provides the trade functions "assortment of goods" and "transport", so what exactly are you paying your extra 50c for? Liquidity. What a bunch of assholes those 7-11 types are. Charging us an extra 50c for milk. The nerve.
  - UweSchmidt 12y ago
    See, as a true HNer (heh..), I would like nothing more than believing that a high tech software operation that makes money and is run by nerds is a force for good. However, I'm afraid your proof-by-analogy does not work. If you actually know what you are talking about, why not explain the current financial system clearer and with more information? In turn I promise not to burden this discussion with a dissection of your analogy, or even my own set of analogies which would beautifully fit my current bias, and which you would surely reject outright.
    - kasey_junk 12y ago
      Another way to describe "liquidity" is inventory risk insurance. Large investors (a term that doesn't actually mean anything) have different time frames for buying and selling their product. If a large participant has to hold onto their portfolio longer than they want this will change the "natural" price they will be willing to accept. Market makers generally, smooth these time disparities. As long as the smoothing is cheaper than the price disparity then it is a net positive for the "real" participants. How do we determine if this is cheaper? Quite simply, the market! You can trade non-liquid products electronically. The price spread his much higher in those products.
pdonis 12y ago
First of all, this argument begs the question: why are some people so insistent on buying milk right now that they are building multi-billion-dollar computer systems and running special data lines with sub-millisecond latencies to do it? Needing milk so desperately that you can't wait until the grocery store opens in the morning is supposed to be an unusual condition, not the normal way of doing business. But more importantly, HFT is not the same as liquidity. HFT only works in the first place because there are already market orders being placed; if no one but HFTs wanted to buy or sell stocks, no trades would take place. So the HFTs, by themselves, can't provide liquidity; they have to wait for someone else to do it, and then execute their trades to help narrow the bid-ask spreads. I'll agree that there is some value to narrowing the bid-ask spreads; but is it enough value to justify the enormous effort and the enormous amount of human talent that goes into HFT, that could be doing lots of other valuable things? I don't think so; I think all that is a sign that the incentives in our society are screwed up.
- pierrealexandre 12y ago
  Are you aware of the distionction between market orders and limit orders? HFTs by themselves can provide liquidity (like any other investor), namely by entering a limit order in the order book. They can also by themselves narrow the bid-ask spread, namely by entering a limit order at a price more competitive than the current first limit. Of course, someone else has to send a market order to the exchange for a trade to execute.
  - pdonis 12y ago
    > Are you aware of the distinction between market orders and limit orders? Yes. > HFTs by themselves can provide liquidity (like any other investor) Exactly: like any other investor. Meaning, the "high frequency" part of HFT is not what provides the liquidity. (I admit that I should have made that clearer in my previous post.) Suppose an HFT enters a limit order that is more competitive than the current limit. Either some other investor would have been willing to trade at the same price (as the HFT's limit order), or not. If not, then it doesn't matter how fast the HFT places the limit order; it's going to increase liquidity in any case. So the "high frequency" part is not necessary; the key is that the HFT is an investor willing to trade at a certain price. But if some other investor would have been willing to trade at the same price, then the only difference the HFT makes is speed: the liquidity gets added sooner than it otherwise would have. So the "high frequency" part doesn't change anything except who the profits from the trade go to.

by gd1 12y ago

UweSchmidt 12y ago

I understand that currently the game is played with high liquidity. The alternative I'd like you to consider would consist of "real" investors with no need for split second decisions and liquidity. Give it a thought. The 7-11 provides the trade functions "assortment of goods" and "transport" and as such is valuable. The analogy to HFT does not hold.

gd1 12y ago
>The 7-11 provides the trade functions "assortment of goods" and "transport" and as such is valuable. "Large supermarket chain" also provides the trade functions "assortment of goods" and "transport", so what exactly are you paying your extra 50c for? Liquidity. What a bunch of assholes those 7-11 types are. Charging us an extra 50c for milk. The nerve.
- UweSchmidt 12y ago
  See, as a true HNer (heh..), I would like nothing more than believing that a high tech software operation that makes money and is run by nerds is a force for good. However, I'm afraid your proof-by-analogy does not work. If you actually know what you are talking about, why not explain the current financial system clearer and with more information? In turn I promise not to burden this discussion with a dissection of your analogy, or even my own set of analogies which would beautifully fit my current bias, and which you would surely reject outright.
  - kasey_junk 12y ago
    Another way to describe "liquidity" is inventory risk insurance. Large investors (a term that doesn't actually mean anything) have different time frames for buying and selling their product. If a large participant has to hold onto their portfolio longer than they want this will change the "natural" price they will be willing to accept. Market makers generally, smooth these time disparities. As long as the smoothing is cheaper than the price disparity then it is a net positive for the "real" participants. How do we determine if this is cheaper? Quite simply, the market! You can trade non-liquid products electronically. The price spread his much higher in those products.

pdonis 12y ago

First of all, this argument begs the question: why are some people so insistent on buying milk right now that they are building multi-billion-dollar computer systems and running special data lines with sub-millisecond latencies to do it? Needing milk so desperately that you can't wait until the grocery store opens in the morning is supposed to be an unusual condition, not the normal way of doing business. But more importantly, HFT is not the same as liquidity. HFT only works in the first place because there are already market orders being placed; if no one but HFTs wanted to buy or sell stocks, no trades would take place. So the HFTs, by themselves, can't provide liquidity; they have to wait for someone else to do it, and then execute their trades to help narrow the bid-ask spreads. I'll agree that there is some value to narrowing the bid-ask spreads; but is it enough value to justify the enormous effort and the enormous amount of human talent that goes into HFT, that could be doing lots of other valuable things? I don't think so; I think all that is a sign that the incentives in our society are screwed up.

pierrealexandre 12y ago
Are you aware of the distionction between market orders and limit orders? HFTs by themselves can provide liquidity (like any other investor), namely by entering a limit order in the order book. They can also by themselves narrow the bid-ask spread, namely by entering a limit order at a price more competitive than the current first limit. Of course, someone else has to send a market order to the exchange for a trade to execute.
- pdonis 12y ago
  > Are you aware of the distinction between market orders and limit orders? Yes. > HFTs by themselves can provide liquidity (like any other investor) Exactly: like any other investor. Meaning, the "high frequency" part of HFT is not what provides the liquidity. (I admit that I should have made that clearer in my previous post.) Suppose an HFT enters a limit order that is more competitive than the current limit. Either some other investor would have been willing to trade at the same price (as the HFT's limit order), or not. If not, then it doesn't matter how fast the HFT places the limit order; it's going to increase liquidity in any case. So the "high frequency" part is not necessary; the key is that the HFT is an investor willing to trade at a certain price. But if some other investor would have been willing to trade at the same price, then the only difference the HFT makes is speed: the liquidity gets added sooner than it otherwise would have. So the "high frequency" part doesn't change anything except who the profits from the trade go to.