[ctlby]

Makers collect the spread from participants who want to transact right now (the price of immediacy). "Real" investors are better off because they paid someone to take a position of their hands that they didn't want. They made their trading problem someone else's.

Takers exploit the option value of resting orders by trading when "fair value" moves but those orders don't. "Real" investors are better off because they cheaply acquired a security they may hold for years (the fact that the price will shortly move against them by a penny or two is irrelevant). Market makers are worse off--but they're HFT guys, and it's not really your problem.

[CyberDildonics]

Do "real" traders want microsecond immediacy? I would think a person would rather have a better price, even if it means waiting a whole second.

[yummyfajitas]

There is a simple flag you can set (it's called "Add Liquidity Only" or "Post Only", depending on the venue) which will result in HFT's never trading with you. Strangely, most "real traders" never set this flag.

https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...

The reason is that it's not a matter of waiting a whole second and being guaranteed a fill. It's placing an order and accepting execution risk; maybe you get a fill, maybe you are stuck holding a tanking stock.

[mrchicity]

If you define HFTs as passive spread/rebate-capturing single instrument market-makers, then yes, but many prop HFTs operate a "hybrid" model where they sometimes cross the spread to flatten their book, or cross if an arbitrage presents itself. There are even HFT strategies that are primarily liquidity taking.

[ctlby]

Obviously not. Humans just want something that feels like "now." That this has changed from seconds to milliseconds to microseconds is an inevitable consequence of the rules of the game--and is completely irrelevant to you. Your horizon is much, much longer than that of the professional trader to whom these details matter.

[CyberDildonics]

So a professional trader is not a person and they do care about microsecond as opposed to seconds? That sounds like a bot, not a person.

[tptacek]

Another place people seem to get jumbled up in these discussions is in comparing institutional traders to individual retail traders.

A person buying or selling individual stocks for their own portfolio isn't impacted by HFT at all. Their orders probably never see a real exchange. Instead, internalizers pay extra money to offer brokerage customers the best possible prices for what they're looking to trade.

That's because HFTs aren't the apex predator in the markets. Informed institutional traders like Goldman are. Market making operations are built around mitigating the risk of getting run over by giant block trades from institutions. When those happen, they take out whole swathes of the order book and leave adverse price changes in their wake.

An electronic market maker will pay a premium to make safe profits off the spread of retail orders, because to a first approximation none of those orders are going to take out the whole book.

Meanwhile, among institutional traders, there are two kinds of firms to look at.

The first kind, the Royal Banks of Canada of the world, are getting paid a tidy sum of money to make large block trades for the cheapest possible price. The RBC trader has knowledge that the rest of the market doesn't: many tens of thousands of shares of something are about to trade, and that trade is going to move the market. They make money by trying to disguise their intent, so that instead of the market price reflecting that intent, they can capture the premium and leave everyone else in the market to hold the bag.

Those kinds of traders hate HFT.

The other kind, the Vanguards of the world, buy or sell based on long-term strategies. They're buying CSCO or MMM to fill out an index. They want the best possible price, of course, but they mostly care about determinism and low cost of trades.

Those kinds of traders like HFT. (You can see the Chief Investment Officer of Vanguard, the world's most trustworthy mutual fund company, saying that repeatedly and emphatically). HFTs reduce spreads and make trading cheaper, and Vanguard doesn't earn profits by taking it out of the hides of their immediate counterparties.

As a public policy matter, I'm not sure why I'm supposed to support regulations that increase Vanguard's cost of trades so that an equities desk at RBC can charge higher premiums to fleece the markets on behalf of their hedge fund clients.

[CyberDildonics]

All of this is misdirection to the point that high frequency traders definitely make money, but it extremely difficult to justify what they add to the market. People making decisions don't want to trade somewhere with high frequency traders and they don't need to for any technical reason.

[kasey_junk]

If they didn't, they aren't required to pay for it. If they want to wait they can. Better yet, if they want the exchange to wait for them until the price gets to be what they want, they can do that as well, without paying for any immediacy at all.

[andylei]

when there was no HFT and market makers were humans, you had to wait a long time for your trades AND spreads were huge (aka, prices were worse).

[CyberDildonics]

You are making an assumption that computers mean high frequency trading. We can use computers to trade without having high frequency traders.