Minute trading introduces very high levels of liquidity to the market.
Your thinking represents a common fallacy: "I cannot immediately see any benefit to X, therefore X is pointless / should be abolished".
Your thinking represents a common fallacy: "I cannot immediately see any benefit to X, therefore X is pointless / should be abolished".
You are right about the feedback loops though.
Prescribing what someone you've never met knows or doesn't know would be, if not foolish, presumptuous.
One definition of liquidity is when you can sell something without affecting the price much. Most people on Wall Street will tell you their job somehow increases liquidity -- connecting buyers and sellers in more and more efficient ways.
HFT seems different. It is comparable to front-running other people's orders. Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab the item first and resell it to our original buyer (and other people in the market) for just a tiny bit more.
From my perspective it's effectively a sort of tax, like a bridge toll. It seems to me like this has to make every transaction affect the price more, not less. How does this increase efficiency or liquidity?
In the stock market, just like the real estate/auto market, there are never just true buyers and sellers; there are also brokers and dealers who keep a inventory of goods, so that they can sell to non-discriminating retail customers who just want the goods right now. Their expertise and self-interests in turns, affects the price of the good in the whole entire market.
The stock market once have had traditional broker-dealers that controlled the spread of a stock. That is, dealers are willing to buy stocks from impatient traders who are willing to sell at a market order at a price that is set by the dealer; the dealers then in turn, later sell their inventory at an artificially inflated price to impatient traders who are willing buy the stock at a market at the price named by the dealer.
Traditional dealers, in order to tack on the risk of carrying their inventory of stocks (after all, a stock could theoretically drop to zero before they could sell the whole lot), keep the spread of the stock big (they are willing to buy low and sell high) at the expense of retail investors.
HFT, due to their high-tech platform and high execution speed tightens this spread because they don't carry as high a risk of inventory; because their execution speed is in timescale of micro-seconds; so essentially, in the timeframe of seconds, they buy a position and then sell that position subsequently and not really carry that position through for the market to affect the value of that position.
This in theory is good for retail investors as they actually end up paying less for their stocks. But with good technology, you could also use it for bad. With fast computers and sophisticated algorithms, HFT traders could learn how to game the traders and big funds that they are suppose to server - just like a regular car or real estate dealer.
If you know where the consumer demand is, you could buy up all of the supply ahead of time and artificially inflate the price to make people pay more. If you know that your competitors are replicating your every move, you could deceive them by making a small trade against your true intention, have them jump on the bandwagon and swiftly punish them by executing your true big trade afterwords. The possibilities are endless.
No. The matching engine will match first the highest priced order, and in the case of orders at the same price, whichever order was placed first. You can't jump ahead in the queue, no matter how fast your algorithm is [1].
[1] This statement only applies to US equities/futures/derivatives markets. I think it might be possible in Canadian markets under some limited circumstances.
(There is a "don't route me" flag if you don't want to be routed. In that case, your order will simply go unfilled - exchanges can't match you at a price worse than the best price available on all exchanges.)
HFT seems different. It is comparable to front-running other people's orders
If INET were to flash your order, they give some HFT firm the opportunity to sell you shares at 99. The HFT firm can accept or reject - if they accept, you pay 99/share + commission and INET gets the commission.
That's a completely different game than front running. It has other issues, like being potentially unfair to ARCA and traders who can't afford flash orders, but it isn't front running.
And what, exactly, is the "tank's holding capacity" for liquidity?
Metaphors are rarely a useful approach to understanding something.
[0] An amusing position for a programmer to take, considering we make completely intangible stuff while spending hours a day sitting on our asses, but one that a lot of people on this site seem to hold.
What is the definition of "real market participant"?
For example, are day-traders real market participants? If not, why not?
How about me? (I rebalance every few months, maybe.)
Note that day traders and I have exactly the same goal - make money. How many people trade for other reasons?
If your job is to record or settle trades, be a day trader with no overnight position, track share holdings, etc. then you are a part of the machinery of this capital market, but you are not one of the participants who provides, or consumes capital. You are part of the cost structure.
The real participants are those who actions reflect beyond the casino itself, and out into the economy beyond.
The purpose of share markets is to provide capital. Long term capital for companies to invest, and in return to provide long term profits for those providing that capital.
If you are providing or consuming capital, even for one day, you are to some extent a real participant.
I think it is fine for people to make money, brokers to charge a fee for a trade, day trading, advising on diversification, etc.. But we should understand that these are costs associated with this system of providing capital/investing.
You sound like you provide capital and participate as an investor.
When using analogies, some explanation is helpful.
The difference with HFC is they don't provide any actual liquidity that matters. They don't hold the apartments across different move in dates.
Both negative AND positive feedback loops independent of underlying value are bad.
I'm not buying the argument that 'HFT' provides any meaningful additional liquidity.
Let's say all subsecond trading is abolished tomorrow, and rather than a smooth curve, all asset prices step at 1-second intervals.
What value was destroyed there?
If none, what value are these guys creating? None?
That will tend to expand the bid-ask spread. That hurts both buyer and seller.
If they overlap very briefly (say, across different markets) and nobody else has noticed yet, a trading program jumps in and arbs the difference. That increases the spread.
Utter nonsense. In the case of crossed markets it is illegal to trade. Trading under these circumstances would violate RegNMS and most matching engines will reject orders that would cross the markets.
HFT firms reduce the spread due to competition. If the spread is $0.03 (say $9.97 and $10.00), I can do one of two things to be at the top of the order book and be the first to trade. I can either place my order first, or I can place an order at a higher price. If I'm the fastest, I have the earliest order at price $9.97 and I get filled first in the event of a trade. In this case, I make $0.03/share. If I'm not the fastest, I can still get to the top of the book by placing an order at $9.98. This reduces the spread to $0.02, and I can only make $0.02/share.
(I'll note that the bid/ask spread becomes effectively zero every time an actual trade happens -- what if it actually reflected market prices rather than a bunch of video games competing against each other?).
Does it hurt the buyer and seller more than the little nibbles these guys are taking to smooth out that curve?
I see a lot of paychecks being cut in this industry and I don't see the value being created. Looks like highway robbery to me.
Why are you assuming that the buyer and seller are hurt?
> I see a lot of paychecks being cut in this industry and I don't see the value being created. Looks like highway robbery to me.
I don't see the value in smurfs, but don't think that they're "highway robbery".
Liquidity, on the other hand, has huge value. Disagree? Try to sell an illiquid asset.
Scenario 1:
So someone offers (is willing to sell) a limit order at $100. Buyer bids at $110. They wait until the other order appears and cross according to some market rules (perhaps at $100, $105 or $110), no-one else gets anything.
Scenario 2:
HFC works out the trading is in range $100 to $110, puts bids in at $104, offers at $106, and makes $2. The sellers gets $104, the buyer pays $106 and both are better off than scenario 1?
Investors providing capital should not care what time of day their trade goes through because it will settle at the same time anyway. So this 'liquidity' is worthless.
The purpose of shares is to raise capital for productive investment, in return for income to long term investors who provide the capital.
Both non-computerized traders, and computerized HFC traders have an obvious cost, they extract return from the markets that would otherwise go to investors. This reduces the returns for investors.
What if we create an exchange where market participants submit orders which are crossed once a day? You establish a fair matching system and clearing price algorithm. In that environment there is less money going to minute traders and so there would be better returns for investors.