It's easy to make paper billions with synthetic shares and infinite deadline extensions for settlement. I'm old and still remember when Ken Griffin was lauded a clever person before he got caught with his hands in the GME mayo jar..
HFT doesn't cost retail investors anything.
It likely lowers the transaction costs due to adding liquidity and narrowing bid/ask spreads for small retail orders.
But indirectly it likely raises costs for institutional investors like pension funds and large ETF managers making giant block trades on behalf their beneficiaries.
So tldr; Probably fractionally better pricing for your $5k GOOG trade, fractionally worse for your VOO holdings over the long term.
There does seem to at least be some evidence that HFT firms decrease retail spreads overall. Either way, my main point being made is that negative impact to retail traders is very much in question.
The money isn’t coming from thin air. If N people trade a a finite set of shares back and forth every day the only way to extract money from that set of people is for them to lose money.
Such wonderful marketing terminology.
That’s not actually free, the cost of trading with less information is quite high.
Why do you think market-making is zero sum? Providing liquidity has value and market makers are compensated for that. (Milliseconds of liquidity being appropriately compensated with fractions of pennies.)
Speed of light delays.
Due to the underlying physics of the universe there’s physical limitations on how much liquidity can matter on sufficiently small timescale.
Ultimately the primping value of markets is in information gathering and by flooding the market with trades based on ms timescales you’re masking important signals with meaningless white noise.
Agreed.
> which combined ends up being significant
No. Combined, it is still de minimis. US equity markets alone trade something like $500B/day of volume or like $125T/year.
Trade volume is meaningless in the face of HFT. The very actions you’re defending prove the numbers you just presented have zero relevance and could increase by 100x with zero benefit to anyone.
However step back a second. Quoting a number roughly equivalent to global GDP is frankly silly here, but it’s an easy enough mistake to make when your basic premise is inherently flawed.
If that was what you where trying to describe the second sentence is unconnected to the first.
> half a penny per share traded
That’s far from de minimis. Rebalancing a portfolio now becomes quite expensive over a lifetime. You lose 0.5c selling and 0.5c buying, on say a 10$ stock and that’s 0.1% per transaction, and you don’t rebalance once.
i.e. retail investor → brokerage platform → clearing/execution infrastructure → Jane Street → payment back toward the brokerage side of the chain.
Who captures the economic value created by retail order flow?
Jane Street.
In an ideal market, this product line shouldn't exist. Institutional investors should not be making money on the activity of retail investors.
What incentives determine where that flow is sent, and would investors receive better execution if their orders were exposed to genuinely competitive price formation rather than privately internalised by a concentrated group of wholesalers?
The regulators should be squashing any HFT related or retail order flow, but it's so opaque _by design_ that getting policymakers, or the general public, to understand that retail investors are paying some portion of tax on their $20T USD annual trades to these companies.
Granted, these order flows _sometimes_ work the other way -- and retail users get a better deal on a trade.. But would you really expect the market to be worth what it is, if that was the case less more often than not?
There is a clear and obvious conflict: the broker is supposed to seek the best execution for the customer while potentially being paid by the firm receiving that customer’s order. How can that be, when the broker's in bed with the liquidity providers?
Due to regulatory capture of the SEC this risk has not materialized in an overall market crash, but they have done numerous accounting shenanigans and deadline extensions to give Citadel more room to breathe.