While we’re on this topic, can some expert ELI5 how or/why HFT is good for markets/economy?
For instance you want to sell something. If you don’t have liquidity in what you are selling that means that you just have a few offers (which may not be enough for you to sell everything at once), and at various prices (so not really optimized for you). But with liquidity, here provided by HFT, you have enough quantity on the buying side to sell all at once and at a price that will be a lot more aggressively optimized.
So yes they will make some pennies on your order but it’s nothing compare to the broker you use and unless you use a bad broker optimizing fees is that last thing to think about. And on top of that they provides both liquidity and price optimization for you and the market.
They won't do a trade if there's no one to instantly sell to, so they aren't adding liquidity, or am I missing something?
I can address some parts of this.
"HFT works by reacting faster than another market participant"
- There are a bunch of different HFT strategies. In this case, we're usually talking about market making, which means you are placing limit orders at a price where you don't believe it will execute immediately. You can react to many things - price movements, events, anything. - In placing a resting order, where is there an assumption that another participant was willing to do the same trade? Sometimes (pretty often) all the orders on a price level are HFT participants, and if you look at the market feed it's pretty easy to tell. - In that case (which I claim is pretty common), the liquidity was not already there. - If we consider that average spread sizes have reduced significantly with electronification and HFT, then you also disprove this assumption that "the liquidity was already there". Liquidity is not just the willingness to buy or sell, it's also the willingness to buy and sell at a competitive price. Otherwise, I mean, I'm always willing to pick up TSLA at $.01, and I'm always willing to sell TSLA at $500k. Doesn't mean I'm providing liquidity.
"They won't do a trade if there's no one to instantly sell to"
- That's simply not true. If you've taken a look at the order book, the fact that an HFT order is resting on the book (and not executed) means that there was nobody to instantly sell to. - Are you suggesting that HFT firms all know that someone is going to come through and buy at a price level, and hop in? Flash Boys suggests this (and it's possible to infer some "whale" actions if they route their orders poorly), and that type of inference is possible sometimes, due in part to the way the US Equities ecosystem is set up. But I'll also ask you - have you thought about the order of operations in which someone might "know that there is someone to instantly sell to?" Consider the CME (futures exchange), where there's a ton of HFT, and for which there are no other markets. How is your sentence supposed to work? - Also, perhaps empirically, that was simply not true for my firm, which was (and still is) a pretty successful one.
Yes, I'm very much a layman on this topic.
> placing limit orders at a price where you don't believe it will execute immediately.
Isn't that a "SFT" strategy? Why do you need super low latencies for something like that?
> Are you suggesting that HFT firms all know that someone is going to come through and buy at a price level, and hop in?
That's how I've commonly seen HFT being described, that these companies would see an order on exchange A and faster than anyone else would bid on exchanges B and C accordingly.
There are complex reasons why improving price discovery and price harmony between markets is good for the wider economy but they're a bit more hand-wavey...
For you this is only $9.00 more than before, but doing this all the time is where HFT makes money, without really offering any benefit to other market participants.
It can benefit stock prices for companies too, since it can cause the market to move more in their direction if machines think they should buy based on whatever they're programmed to look at.
I looked into this for a while, but I simply felt it was immoral and dropped the project.
which can also harm companies if algorithms decide to sell, which might trigger sell chain for everyone