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I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is mo

I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is more efficient).

vegabook 11y ago
That's my point. For the vast majority of (smaller) flows HFT makes bid/offer tighter. TLDR on the above: HFT makes you pay a fair price for your liquidity requirement. If you're retail, your liquidity requirement is negligeable. If you're big your liquidity price is high. It's fairer. In the old human system big funds' artificially high (cheap) liquidity is sponsored by the small player's artificially expensive liquidity and/or market move against him/her before he/she trades.
- foobarqux 11y ago
  It's more complicated than you suggest: If informed trading can't capture a good portion of the difference between the "true" price and the current price then there isn't an incentive to do it.
deleted 11y ago
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mrchicity 11y ago
The spread is tight for small orders, but if you keep hitting them in one direction, market makers quickly get wise to this and start pulling back. The cost to trade for large funds isn't just the bid-offer spread, but also how quickly the market reacts to their flow. Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. This is also why big funds want rules like trade-at (all orders must trade on-exchange) which eliminate the ability for market makers to explicitly segregate order flow. If all retail orders went to exchanges, market makers would give tighter prices on average to win the retail flows. Basically retail traders would subsidize institutional ones.
- tptacek 11y ago
  Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. My understanding was that it's mostly the opposite, that MMs profit from uninformed order flow (so much so that they'll buy access to it from brokerages), and that informed traders were their predators in the market food chain. At any rate: cost of trading has by every account I can find plummeted since the introduction of automatic trading. As recently as the 1990s, spreads were quoted in eighths of dollars, and there was widespread collusion to fix prices at quarters. In 70s and before, the markets were worse; basically organized fleecing operations.
  - mrchicity 11y ago
    Yes I mean if I think the fair price of a stock is $100, and I knew who I was trading with, I might bid 99.99 offer 100.01 to a retail trader, but bid 99.95 offer 100.05 to a bank or hedge fund. The retail trader probably doesn't have short-term info and he's not going to keep trading in the same direction so I don't need to make as much spread. On exchange markets you can't really tell who you trade with so you have to guess.

I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is more efficient).

vegabook 11y ago

That's my point. For the vast majority of (smaller) flows HFT makes bid/offer tighter. TLDR on the above: HFT makes you pay a fair price for your liquidity requirement. If you're retail, your liquidity requirement is negligeable. If you're big your liquidity price is high. It's fairer. In the old human system big funds' artificially high (cheap) liquidity is sponsored by the small player's artificially expensive liquidity and/or market move against him/her before he/she trades.

foobarqux 11y ago
It's more complicated than you suggest: If informed trading can't capture a good portion of the difference between the "true" price and the current price then there isn't an incentive to do it.

deleted 11y ago

[deleted]

mrchicity 11y ago

The spread is tight for small orders, but if you keep hitting them in one direction, market makers quickly get wise to this and start pulling back. The cost to trade for large funds isn't just the bid-offer spread, but also how quickly the market reacts to their flow. Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. This is also why big funds want rules like trade-at (all orders must trade on-exchange) which eliminate the ability for market makers to explicitly segregate order flow. If all retail orders went to exchanges, market makers would give tighter prices on average to win the retail flows. Basically retail traders would subsidize institutional ones.

tptacek 11y ago
Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay. My understanding was that it's mostly the opposite, that MMs profit from uninformed order flow (so much so that they'll buy access to it from brokerages), and that informed traders were their predators in the market food chain. At any rate: cost of trading has by every account I can find plummeted since the introduction of automatic trading. As recently as the 1990s, spreads were quoted in eighths of dollars, and there was widespread collusion to fix prices at quarters. In 70s and before, the markets were worse; basically organized fleecing operations.
- mrchicity 11y ago
  Yes I mean if I think the fair price of a stock is $100, and I knew who I was trading with, I might bid 99.99 offer 100.01 to a retail trader, but bid 99.95 offer 100.05 to a bank or hedge fund. The retail trader probably doesn't have short-term info and he's not going to keep trading in the same direction so I don't need to make as much spread. On exchange markets you can't really tell who you trade with so you have to guess.