Liquidity is always there. Until it ain't.
Regulators found HFT's exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines. Regulators determined that high frequency traders sold aggressively to eliminate their positions and withdrew from the markets in the face of uncertainty.
http://en.wikipedia.org/wiki/2010_Flash_Crash
Berkshire Hathaway has a difference of 1000 dollars for its bid ask spread yet you dont see a lot of people complaining, do you?
Thank you. That is all that needs to be said.
Norway's sovereign wealth fund (one of the largest in the world, they own 1% of all US stocks) just came out on this exact topic:
http://www.efinancialnews.com/story/2013-09-17/norways-sover...
> Next, the paper takes on HFT's usual defence – that they provide the market with much-increased liquidity. Norges Bank worries that this liquidity is "transient" - i.e. HFTs often place large orders only to then cancel them, creating "phantom" liquidity and leaving "buyside traders fac[ing] new challenges in assessing posted liquidity."
But great for you! Because maybe you're the guy selling MSFT shares to them. You get the benefit of the price rising faster.
The market is more efficient. Norway can no longer take advantage of the fact that it knows that there's all this additional demand (originating from itself) and it takes a while for everyone else to figure that out.
1. kagillion (shares, %ADV, notional dollars)
2. good old days (single year or a range)
3. too much (in $ or %)
2. It's not a binary thing but a gradual transition from mostly human market makers in the 80s to mostly algorithmic market makers today.
3. I'm on shakier ground on this one, but a fraction of a % of their cost.
This is because there's not just one HFT. There are tons. So if one of them tries to do this you won't sell to them, you'll sell to one of the other ones for a better price. Yay competition!
"Volatility, a measure of the extent to which a share’s price jumps around, is about half what it was a few years ago."
Quoted from here:
http://www.businessweek.com/articles/2013-06-06/how-the-robo...
Although I wish I could find a better article / source with more info and some hard data to back that up. That sentence is not nearly as compelling as it could be if it had more details.
And I've yet to see a convincing argument that HFT is of any benefit to anyone else other than themselves.
At the most basic level, HFT firms make money, right? Otherwise they wouldn't be doing this. Where does this money come from? Entities that are holding these same stocks for longer periods of time. It increases the costs to the longer-term buyers, and it decreases profits to the long-term sellers.
HFT is sand in the gears of the economy, not lubricating oil like they would have you believe.
Several exchanges (the Hong Kong Stock Exchange, for one) rate-limit each connection to the exchange, charging fees based on the number of transactions per second allowed on the connection.
It's like saying that if you add a 1% tax on food that all grocery stores will go out of business because their margins tend to be really small (around 1%). Clearly that's not what actually happens.
Avoiding systems that don't create value would help us live in a world with more value in it. That's why considering this is very productive, and helps moral people avoid wasting precious resources on zero sum games.
He was giving his own value judgement about it.
Also, I do think that knowing whether something actually creates value or not (is a positive-sum, negative-sum or zero-sum game) is definitely helpful in understanding large systems. i.e: It helps predicting whether a society will succeed or fail, by seeing how much of it is wasted on negative/zero sum games.
Societies will succeed more or less based on various parameters, one of which is whether they generate value to sustain themselves or not.
A perfect description of many forms of organized crime.
The classic example is -- if I recall correctly -- a mutation sometimes found in mice. The mutation causes a male to only produce male children. This mutation will spread through the population until there are only male mice, and one generation later the mice are all dead.
The "forced coercion" typically only comes into play if someone fails to hold up their end of a contract---criminal organizations cannot sue.
But, you know what they say: In theory there's no difference between theory and practice. In practice, there is. ;)
I think Insider Trading is more of a problem than the public knows?
A lot of the loudest criticism of HFT is that it's too competitive - a lot of people who used to make a comfortable living from the bid/ask spread are no longer able to due to computers driving down profit margin.
There's a limited total profit potential everyone competes for, which limites the number of players and the expenses that can be justified.
And that profit potential is directly related to market volatility. Which peaked in 2008 and has since gone down drastically.
Unless you're prepared to devote alot of time to learning, it's best to stick to index funds, or lower risk investments (GICs).