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Comment by tptacek | Hacker News Reader

In what way does HFT "discourage investor participation"? Before there was high-speed electronic trading, virtually no investors were out there trying to outcompete market makers or run elaborate pairs trading strategies.

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That's the term the SEC uses to explain why a fair market is important. If ordinary investors and traders believe that low latency traders have systematic advantages over them, they will lose confidence in the market and choose not to participate.

There is no evidence that HFT dissuades ordinary investors from participating in the market. The Chief Investment Officer at Vanguard, the most important retail investor in the world, has repeatedly said that HFT is an unalloyed good for them: if what you do is buy stock and hold it, all HFT does is make it cheaper to execute your orders. You can also just, you know, look at stock prices and decide for yourself whether people are avoiding the stock market.

I'm sure HFT does dissuade a class of day traders from participating in the market. But who cares? Electronic trading also killed the human market makers, who simply got outcompeted. The result, again, was an unalloyed good: the human market makers were crooked as a wallet full of 3 dollar bills.

I think I understand your view that low latency trading is fair competition. I see that from the perspective of traders, it's unfair skimming that's literally impossible to compete with. (Compare in more corrupt days, you could literally pay NASDAQ for faster access to price information.) I am still interested in that competition improves spreads or efficiency.

There is obvious evidence that algorithmic trading has improved spreads: look at the spreads. Since the advent of electronic trading, they've fallen from almost a dollar(!) to pennies. Human traders colluded to keep spreads high; Google [odd eighths].

Sorry, I mean microsecond-level competition. I agree regarding algorithmic trading.

The microsecond level competition comes from the fact that the HFTs can't compete on price below one cent, because the minimum quote increment is one cent. So they have to compete with each other on speed. There have been proposals to allow sub-penny quotes, and thus let the HFTs compete more on price and possibly bring spreads down even further, but those proposals don't seem to have gone anywhere.

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