I would say hedge funds have massive negative social value (especially quant/HFT ones), and actively contribute to wealth inequity. Robert Mercer is a prime example of this. Not saying I think your friend is a bad person or should quit, but it's kind of a naive justification.
> TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014.
https://web.archive.org/web/20140404072855/http://tabbforum....
I mostly agree that Robert Mercer has been a force for evil in the world, but subjectively my impression is that finance billionaires are more likely than people from other industries to spend their money on relatively uncontroversial philanthropy.
Personally I have no reason to think finance billionaires use their wealth more ethically than any other group.
The story about lower spreads is also rather dubious. I can believe that going to sub-second HFT reduces spreads slightly, but what's the point? By how much, exactly, is the spread reduced by going to the extremes that HFT goes to, and how does it compare to just your regular intra-day swings?
What's useful to society at large is long-term capital allocation. Regular people don't do day-trading, they place orders "at market" maybe a few times per year at most (or perhaps monthly as part of an automatic plan). The loss from intra-day variations will dwarf the measly reduction in spread that is achieved using sub-second HFT.
So in that light, it's good to see that apparently HFT is becoming less profitable.
When you participate in the market, the spread is the "price" you have to pay to transact. When this goes down, it benefits all participants in the market, and especially the ones that are doing "long-term capital allocation" you are talking about. Rather than take my word for it, here's a quote from the CEO of Vanguard: “From a data perspective, we can see what’s happened to our fund shareholders over the last 20 years, and they’ve benefited by that reduction in transaction costs.” [1]. If you're managing trillions of dollars of 401ks, pension funds, etc, and you are constantly rebalancing your assets, buying new allocations, etc, any tiny reduction in average spread is a huge savings on net. A big part of the reason why there's been an almost universal reduction in fund management fees, saving retirement savers an enormous amount of money over the last 10 years or so is this reduction in spreads. This is absolutely a huge benefit to society, and its almost entirely attributable to HFTs.
You're correct that it HFT is a zero-sum arms race, and maybe you could make the argument that in an optimal allocation of society's resources, perhaps you could have less than the current number of participants. But I think you could actually make this argument about almost all lucrative & highly competitive fields. If anything, HFT is more productive per unit of labor, relative to other sectors of society - that's why the compensation is so high!
The total number of programmers and quants that work in HFT, at least for the 5-10 significant players, is probably less than the number of programmers Google alone employs (last I checked, there are about 30k programmers working at google. There's almost certainly less than 30k quants and programmers working at the main HFT firms). How many programmers do you "need" to optimize ads for eyeballs? Or how many programmers do you "need" to make mobile phone games? Or work on social networks? etc etc.
HFT is a small, niche, industry, and I think extremely productive per employee relative to most other industries. It replaced the tens of thousands of manual traders that used to be responsible for arbitrage and market making with automated robots, dramatically increasing market efficiencies while reducing the amount of human capital required to provide those services. It seems pretty misguided to make the argument that HFT is somehow "bad" or a "waste" of resources, given how much of an improvement it was to what there was before, and also given how small the industry really is.
[1] https://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-...
You also disregard my whole point about just how high the HF in HFT needs to be. One can easily imagine a market that operates in rounds of blind auctions, one auction per second or one per minute or something along those lines. This would take out a lot of the arms race, and it's implausible that spreads would be much higher in such a market in a way that would hurt other investors: after all, you'd still expect competition between participants in a way that drives their profits down.
> A big part of the reason why there's been an almost universal reduction in fund management fees, saving retirement savers an enormous amount of money over the last 10 years or so is this reduction in spreads.
That makes zero sense. A significant loss due to higher spreads wouldn't show up in fund management fees, it would just show up as lower returns of the fund before management fees.
> If anything, HFT is more productive per unit of labor, relative to other sectors of society - that's why the compensation is so high!
That's at least doubtful. I would argue that compensation in HFT is high because it sits adjacent to large streams of money. In practice, a lot of compensation is ultimately about siphoning small fractions away from the streams of money you're near to, and the size of that stream makes more of a difference than almost anything else, but that's really only a form and function of power -- it doesn't correlate with how productive you are to society. (I suppose if you just define productivity as compensation per hour worked, as economists often do, then what you say is strictly speaking true, but it's also kind of circular and therefore meaningless.)
Science progresses because all willing to accept new ideas. Are they always right? No, but it can become dangerous when people are afraid to think for themselves, like Copernicus and the Catholic Church.
As humans, we must explore and exploit; Mercer chooses his path as he rightfully can.
Obviously there are not many Robert Mercers making money by running hedge funds, but there are countless millionaires and billionaires exacerbating their wealth through hedge funds.
You’re talking about a few thousand people a year