4 ms·

> The people it's bad for is the old-school style brokers (which are effectively gone now) and large investmant banks who have a fundamental view on the market

> The people it's bad for is the old-school style brokers (which are effectively gone now) and large investmant banks who have a fundamental view on the market (they need to be smarter about executing since the market is more efficient and reacts much more quickly to their buying and selling). What about index funds rebalancing their portfolios? (Honest question)

tptacek 12y ago
The Chief Investment Officer at Vanguard, of VFINX fame and widely considered to be among the most trustworthy fund companies, stated that HFT had improved things for firms like theirs.
lrm242 12y ago
Index funds, or really anyone with long horizon investment objectives, are major benefactors of HFT. Note, "HFT" really means nothing in modern context, but regardless, what most mean are "Electronic Market Makers". Long horizon investors benefit directly from being able to access cheap and plentiful liquidity pretty much whenever they want to. Spreads are tighter because there is now significant competition to provide that liquidity.
reverend_gonzo 12y ago
By "fundamental view on the market", I mean those who have done research and know that the price of something is under- or over-valued. These are generally known as informed investors. When they decide some security/commodity/etc is mispriced, they will immediately put a lot of money into that idea, ideally (for them) before the market adapts. With HFT, the market adapts a lot quicker than before, which is better for general investors (who are uninformed investors) as they get a price that's closer to the real value. Index funds don't have a view on specific securities. They don't perform research to try to get an edge. Instead, they believe that the market is generally efficient, the and they try to lower risk by diversifying across a large portfolio of somewhat related securities, and get a return that closely matches the overall market. As such, HFT helps them by givings them better bid-ask spreads and also providing prices that are closer to the actual value of an asset. Note that those performing fundamental analysis and buying millions of dollars worth of assets aren't SOL. They just have to be smarter about how they execute.
- tptacek 12y ago
  A nit: informed traders are the apex predators in the ecology that market makers live in. In the literature, market-making algorithms are designed around hiding from them. HFT helps informed investors even more than it helps index funds.

tptacek 12y ago

The Chief Investment Officer at Vanguard, of VFINX fame and widely considered to be among the most trustworthy fund companies, stated that HFT had improved things for firms like theirs.

lrm242 12y ago

Index funds, or really anyone with long horizon investment objectives, are major benefactors of HFT. Note, "HFT" really means nothing in modern context, but regardless, what most mean are "Electronic Market Makers". Long horizon investors benefit directly from being able to access cheap and plentiful liquidity pretty much whenever they want to. Spreads are tighter because there is now significant competition to provide that liquidity.

reverend_gonzo 12y ago

By "fundamental view on the market", I mean those who have done research and know that the price of something is under- or over-valued. These are generally known as informed investors. When they decide some security/commodity/etc is mispriced, they will immediately put a lot of money into that idea, ideally (for them) before the market adapts. With HFT, the market adapts a lot quicker than before, which is better for general investors (who are uninformed investors) as they get a price that's closer to the real value. Index funds don't have a view on specific securities. They don't perform research to try to get an edge. Instead, they believe that the market is generally efficient, the and they try to lower risk by diversifying across a large portfolio of somewhat related securities, and get a return that closely matches the overall market. As such, HFT helps them by givings them better bid-ask spreads and also providing prices that are closer to the actual value of an asset. Note that those performing fundamental analysis and buying millions of dollars worth of assets aren't SOL. They just have to be smarter about how they execute.

tptacek 12y ago
A nit: informed traders are the apex predators in the ecology that market makers live in. In the literature, market-making algorithms are designed around hiding from them. HFT helps informed investors even more than it helps index funds.