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The liquidity benefit is a straw man in the entire HFT debate. It's easy to poke holes in liquidity as a value add. The real benefit from HFT is what it has re

The liquidity benefit is a straw man in the entire HFT debate. It's easy to poke holes in liquidity as a value add. The real benefit from HFT is what it has replaced. Before HFT & direct access trading we had a closed system run by specialists and market-makers. Every single trade had to go through a specialist or MM. Spreads were wide and the system made incredible returns skimming each trade. That system was replaced by HFT which had the effect of opening the market up to anyone willing to run an HFT operation, tightened spreads and yes added liquidity. The fact that HFT 'skims' of trades is nothing new to the system, the real benefit is how much less we all get skimmed today than we did 20 years ago. Is it perfect? No. But it's a step in the right direction.

kevinskii 11y ago
Unless I misunderstand it seems you're pointing out a benefit of automated electronic trading, not HFT. Most people distinguish between the two when arguing that HFT is detrimental.
- dlp211 11y ago
  And on top of that, how many of us are actively trading day in and day out? The added value there doesn't benefit the vast majority of society. EDIT: People with pension funds, 401k's, IRA's, and the like are not trading day in and day out. They typically purchase funds which do the trading on their behalf. Most of these funds are controlled by institutions that aren't subject to be skimmed by the MM's as they are the MM's themselves.
  - bboreham 11y ago
    Anyone with a pension fund?
  - seeingfurther 11y ago
    I'll say it more plainly. Long term or short term holders of stock... doesn't matter... if you are invested in the market you need to exit or enter a trade. Today you get less screwed than you did twenty years ago, that's a fact.
- Nimitz14 11y ago
  That's what HFT are. This critique of Michael Lewis recent book goes into HFTs: https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/ https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-... > Back in the days of pit traders, if you threw a huge order at the pit, you might get a fill on a couple of round lots. The rest of the pit is going to change their prices, because they figure anyone swinging 10,000 or 100,000 share orders around must be informed traders. If they’re informed traders, they need to pay for their immediacy. Informed traders may be criminal insider-trader creeps, they may be people with really good trading strategies; it doesn’t matter -they’re informed somehow: they know stuff. If the market maker doesn’t adjust their prices in front of an informed trader, the market maker will go bankrupt. That’s market economics 101.
goodcanadian 11y ago
Sure. But is it possible that there is a limit to its value? Could it have reached and passed the point of diminishing returns? It was not really my intent to start up yet another debate about HFT in particular. I don't necessarily claim to know the answers to these questions. My point was more that there is a lot wrong with the financial system, but there is a core of good as well. It is a false dichotomy to argue between it being an evil broken system and a system that is working perfectly well that provides nothing but good. I was hoping to provoke a more thoughtful debate than we usually get around these matters. (And actually, your comment is a step in the right direction.)
at-fates-hands 11y ago
>> That system was replaced by HFT Actually computer trading replaced that back in the 1980's, which was a prime suspect in the 1987 crash. It preceded HFT by almost a decade: "Program trading", as it is commonly called, has been accused of injecting what critics call wild and unwarranted swings into the market, regardless of the economic fundamentals underlying stock prices. This computer-assisted trading has been credited with helping feed the remarkable runup in stock values that began in 1982. But in the wake of Monday's historic 508-point plunge in the Dow Jones industrial average, the technique was being viewed as a destructive force. "I think program trading is awful. I think that 508-point drop was caused by it," Richard Wholey, a broker-analyst at Wayne Hummer & Co., a small Chicago investment firm, said Wednesday. "There was no other reason for the markets to react the way they did." Haskel b. Benishay, professor of managerial economics at Northwest University's Kellogg School of Management, described program trading as "a bit of a monster which makes money for a few people." source: https://www.questia.com/newspaper/1P2-5415858/analysts-accuse-computer-trading-of-fueling-record https://www.questia.com/newspaper/1P2-5415858/analysts-accus... I guess we still haven't learned our lesson yet.
- seeingfurther 11y ago
  Huh? Automated trading wasn't the 'system' HFT replaced? HFT is automated trading. HFT replaced humans who operated the specialist booths and the market making on NASDAQ. Automated trading in the 80's was still run through people to execute trades.
tsotha 11y ago
I don't think you can conflate automated trading with HFT. You could certainly gain the benefits of automated training without HFT, something that would probably save a boatload of cash.
- seeingfurther 11y ago
  It's not possible to conflate two things that are the same. HFT defines a trading style with shorter holding times but is still automated.
  - tsotha 11y ago
    No, they are not the same at all. HFT requires automation, but you can (and should, IMO) have automation without HFT.

kevinskii 11y ago

Unless I misunderstand it seems you're pointing out a benefit of automated electronic trading, not HFT. Most people distinguish between the two when arguing that HFT is detrimental.

dlp211 11y ago
And on top of that, how many of us are actively trading day in and day out? The added value there doesn't benefit the vast majority of society. EDIT: People with pension funds, 401k's, IRA's, and the like are not trading day in and day out. They typically purchase funds which do the trading on their behalf. Most of these funds are controlled by institutions that aren't subject to be skimmed by the MM's as they are the MM's themselves.
- bboreham 11y ago
  Anyone with a pension fund?
- seeingfurther 11y ago
  I'll say it more plainly. Long term or short term holders of stock... doesn't matter... if you are invested in the market you need to exit or enter a trade. Today you get less screwed than you did twenty years ago, that's a fact.
Nimitz14 11y ago
That's what HFT are. This critique of Michael Lewis recent book goes into HFTs: https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/ https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-... > Back in the days of pit traders, if you threw a huge order at the pit, you might get a fill on a couple of round lots. The rest of the pit is going to change their prices, because they figure anyone swinging 10,000 or 100,000 share orders around must be informed traders. If they’re informed traders, they need to pay for their immediacy. Informed traders may be criminal insider-trader creeps, they may be people with really good trading strategies; it doesn’t matter -they’re informed somehow: they know stuff. If the market maker doesn’t adjust their prices in front of an informed trader, the market maker will go bankrupt. That’s market economics 101.

goodcanadian 11y ago

Sure. But is it possible that there is a limit to its value? Could it have reached and passed the point of diminishing returns? It was not really my intent to start up yet another debate about HFT in particular. I don't necessarily claim to know the answers to these questions. My point was more that there is a lot wrong with the financial system, but there is a core of good as well. It is a false dichotomy to argue between it being an evil broken system and a system that is working perfectly well that provides nothing but good. I was hoping to provoke a more thoughtful debate than we usually get around these matters. (And actually, your comment is a step in the right direction.)

at-fates-hands 11y ago

>> That system was replaced by HFT Actually computer trading replaced that back in the 1980's, which was a prime suspect in the 1987 crash. It preceded HFT by almost a decade: "Program trading", as it is commonly called, has been accused of injecting what critics call wild and unwarranted swings into the market, regardless of the economic fundamentals underlying stock prices. This computer-assisted trading has been credited with helping feed the remarkable runup in stock values that began in 1982. But in the wake of Monday's historic 508-point plunge in the Dow Jones industrial average, the technique was being viewed as a destructive force. "I think program trading is awful. I think that 508-point drop was caused by it," Richard Wholey, a broker-analyst at Wayne Hummer & Co., a small Chicago investment firm, said Wednesday. "There was no other reason for the markets to react the way they did." Haskel b. Benishay, professor of managerial economics at Northwest University's Kellogg School of Management, described program trading as "a bit of a monster which makes money for a few people." source: https://www.questia.com/newspaper/1P2-5415858/analysts-accuse-computer-trading-of-fueling-record https://www.questia.com/newspaper/1P2-5415858/analysts-accus... I guess we still haven't learned our lesson yet.

seeingfurther 11y ago
Huh? Automated trading wasn't the 'system' HFT replaced? HFT is automated trading. HFT replaced humans who operated the specialist booths and the market making on NASDAQ. Automated trading in the 80's was still run through people to execute trades.

tsotha 11y ago

I don't think you can conflate automated trading with HFT. You could certainly gain the benefits of automated training without HFT, something that would probably save a boatload of cash.

seeingfurther 11y ago
It's not possible to conflate two things that are the same. HFT defines a trading style with shorter holding times but is still automated.
- tsotha 11y ago
  No, they are not the same at all. HFT requires automation, but you can (and should, IMO) have automation without HFT.