What's the value of HFT? If exchanges were required to add a random delay to very trade to work against high frequency traders, would anything of value be lost?
Some people have this notion that if their trade got matched against a HFT that they have somehow lost out. The exact opposite is true. If the party on the other side of your trade was a HFT, then that implies that all other parties were offering worse prices than the HFT was. If the HFT had not been there, you would have got a worse price (whether on the buy side or the sell side). The presence of high-frequency traders (or any traders, for that matter) reduces spreads and increases liquidity.
The only people who get worse deals as a result of high-frequency trading are people who would sell you the same stuff for more money.
The substance of your post is describing price discovery - price discovery isn't the issue here. The issue is that the price discovery is being done in milliseconds.
The substance of the complaint is the speed of the auction that discovers the price. The faster price discovery is being done, the fewer traders can participate. If a few milliseconds can change the value of a financial instrument then we have to accept that waiting a second or two will allow a lot more traders to reevaluate and offer a fair price.
The HF in HFT looks like a play to reduce the number of traders who can act on information, which means the buyer/seller is probably getting scalped. HFT traders are making money arbitraging the speed of information dissemination, which indicates that other traders would offer different (/better) prices if the market waited a half-second or so to let everyone gather all the relevant data.
The faster the price discovery, the shorter the validity time. This means a more accurate price.
> If a few milliseconds can change the value of a financial instrument then we have to accept that waiting a second or two will allow a lot more traders to reevaluate and offer a fair price.
You're making the mistake of assuming the price is static. If I have to quote you a price on an instrument that's valid for the next 5s, I have to be more conservative than if I'm quoting for the next 5ms. Which means you get a worse price.
> The HF in HFT looks like a play to reduce the number of traders who can act on information, which means the buyer/seller is probably getting scalped. HFT traders are making money arbitraging the speed of information dissemination, which indicates that other traders would offer different (/better) prices if the market waited a half-second or so to let everyone gather all the relevant data.
There's literally nothing stopping or limiting the numbers of players operating at this speed. What the race actually results in is all market participants getting smaller spreads and better prices.
A continuous market price is an illusion; let's not forget that. Every market is made up of trades, which are discrete, and every price has an unstated amount of uncertainty, which may be large by any standards. You can't know from first principles whether a change in quoted price is even a change in the market, because it could be within the +/- range that's implicit. Apple is quoted to the nearest penny, at least, but the idea that the current price is accurate to within 0.004% is ridiculous.
Edit:
"Fischer Black famously defined an efficient market as “one in which price is within a factor of 2 of value, i.e., the price is more than half of value and less than twice value,”
...I hadn't heard this before Matt Levine mentioned it, but I was like "yeah, obviously, why haven't most people gotten the message?"
But: "BNP Paribas...said [Saudi] Aramco was worth exactly $1.424394 trillion."
I wonder which particular millisecond that held for.
Edit Edit: The market has a whole (mostly) unseen dimension other than uncertainty, which is depth. You can only buy or sell so many shares at the instantaneous market price. Further away, there may be orders, but the price of the whole company is going to be way outside of that. The shorter the timescale, the shallower the "market" so you can't just say we're making progress by doing things faster. It's like when research lasers are said to make unbelievable power, but it's like for a femtosecond or something. Liquidity, in my mind, requires depth, just as with water.
And to address your concerns about depth, I believe that's where market makers (which are related to HFT) come in.
Look at gas stations. If people are spending $1 driving around to save $0.10, then that's not good and at least public policy shouldn't encourage it.
I'm not quite getting this point. If I have a sell order at price x and it's filled by a HFT 1 second before someone with a slower algorithm, how does that result in a more "fair" price for me? If the HFT instead posts a buy order at an unfair price x-1, there's nothing stopping the slower traders from taking my sell order at x one second later.
HFT trading isn't about executing the same trade as someone else but a tiny margin faster. That wouldn't have any special impact on market spreads or liquidity, for example.
There aren't any complaints against the T in HFT; as traders they are helpful. The value questions are about the HF and whether it is a desirable part of the market or an unhelpful arbitrage opportunity created only by implementation details of the exchange.
Just imagine you want to exchange a currency because you go traveling and the exchange tells you "Sorry, nothing available right now, gotta come back in a few weeks". That's what would happen if there is no liquidity.
Speaking personally, I'd even be happy to wait several seconds to see if someone else is willing to pay a better price.
Why? If the HFT firm was willing to offer me $X 2 milliseconds ago they are probably still willing to offer $X now. It isn't like there has been time for anything to change; there are going to be short periods of time where there is literally no new information.
And they are just as likely to be offering me more now than less as conditions change.
Not really. The spreads were terrible before HFT market making.
The average person may be overly paranoid about HFT, but it doesn't make sense to say they benefit from it, because they are not going to be in a position where they benefit from an execution in a fraction of a second.
Price improvement of fractions of a penny has gotten silly too. It's easy to think of it as more significant than it is, until you figure it as a percentage (or the spread for that matter).
It's kind of like how ultra-sensitive people are to gas prices...
Smaller spreads lower costs for everyone: institutional, retail etc.