[__d]

The counter argument is that they do provide a benefit, by providing liquidity and/or making price discovery more efficient.

Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.

[Frondo]

I don't think it's acrimonious to say that no, that liquidity is not beneficial to society as a whole.

I struggle to see how any sector other than the financial sector would suffer if all trades happened once a second, or even once a minute. No process in the human world is going to change the value of a company quicker than that.

[tptacek]

It's not "acrimonious", it's just wrong.

Liquidity keeps spreads narrow. Wide spreads are a tax paid by retail investors to a cabal of sell-side firms.

[Frondo]

We don't need the amount of liquidity the HFT people say they're providing. No one benefits but them. They're not adding value to society.

[tptacek]

So what's the RIGHT amount of tax we should be paying to commercial market-makers for the privilege of trading?

The residential real estate market is gigantic, a demonstrably functional piece of the US economy. Maybe the stock markets should work more like the real estate market. Forget about liquidity. Who needs it? Instead, we'll just pay seven percent of every transaction to an "agent".

[Frondo]

Good question! I don't have an answer to that. I do know that the markets survived just fine before the HFT companies came along, and now that they're here, I don't see society as a whole any better off for their presence.

Maybe, without just saying "they provide liquidity" and leaving it at that, you can explain how the post-HFT world is better for anyone but the HFT companies?

[tptacek]

Why don't I just let Vanguard, the most trusted firm in all of retail investing, explain that for me? Go look up with their Chief Investment Officer said about the impact HFT has on Vanguard's mutual funds.

[usefulcat]

I tend to agree that the value of a company doesn't actually change substantially from one second to the next. But to focus on that is to ignore the value of having liquidity available. For an example of what can happen when there isn't enough liquidity, take a look at the graph of RSP on the morning of August 24th.

For a more detailed description of the mechanics and motivation behind market making, I recommend "A High Frequency Trader's Apology": https://www.chrisstucchio.com/blog/2012/hft_apology.html

If traders, be they high-frequency or otherwise, can't make money by making liquidity available, they won't do it. Less liquidity means wider spreads, which means higher costs especially for smaller transactions (i.e. individual investors).

You could reasonably argue that HFT has caused expenses to increase for large investors who need to buy or sell large volumes of shares. But to the extent that is true, it is like saying that large investors used to get on average an unreasonably good deal at the expense of their counter parties. As in any free market, an especially good price for one party is by definition an especially bad price for the other party.

[Marazan]

They cannot add liquidity. They HFT can only make money when there are slower traders willing to buy and sell.

Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.

[tptacek]

Look at a market without market-makers. Housing is a good one. Houses sell only when there are "slow" traders willing to buy and sell. Have you ever bought or sold a house? Would you like the financial markets to be more like real estate?

[Frondo]

The alternative to HFT is not the real estate market.

The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.

[tptacek]

The markets in the decades before HFT were crooked like a bucket of fish hooks! They were NOTORIOUSLY corrupt. Everyone was scamming everyone else. The entire market was a giant grift. Are you really sticking up for 1980s trading? Or have you just not done much research about how it worked?

[Frondo]

Really? And now, with HFT, they're no longer crooked? If I remember right, in the 2000s we've seen a ton of crooked market scandals (fraudulently rated securities, LIBOR, etc etc). I don't see this relationship you're positing between HFTs and a non-corrupt trading market at all.

[tptacek]

That's an illogical response.

[Marazan]

You seem to be accepting the premise that HFT algorithms a e acting as market makers.

I reject that premise. HFT algos are majoritarily run in markets with deep liquidity.

[auntienomen]

Markets with lots of market-makers have more liquidity! Film at 11!

[tptacek]

So do most market-making firms.

[toomuchtodo]

I believe the question is: could the same market-making/liquidity be provided without the amount of profit being taken by HFT firms?

[vasilipupkin]

this is incorrect. HFT can make money adding liquidity to a market that erroneously is lacking in liquidity ( mispricing )