[minimax]

I think that's about half right. A 0.5% tax on all equities trades, which is what Bernie was proposing, would put a bunch of HFTs out of business basically overnight and at the same time dramatically increase costs for investors via 1) the tax (obviously) 2) wider spreads 3) reduced liquidity.

[rramdin]

4) increased volatility 5) less efficient price discovery

The HFT shops put millions of dollars into research to attempt to ascertain correct prices (e.g. ETF pricing, derivatives pricing, etc). If they are disincentivized from trading in the equities markets, they will no longer be a conduit of relevant pricing information from other global markets into the equities markets. That means investors (big Wall Street firms catered to by IEX) and retail (you and me in our individual accounts) are more likely to be trading mis-priced markets.

[stouset]

What is the value of trading at increasingly marginally more accurate prices? And more importantly, what is the cost?

You seem to take it at face value that trading at accurate prices is an unalloyed good. But for the extremely overwhelming majority of retail investors — whose only sane strategy is buy and hold — buying at a few tenths of a percentage points closer to the most-accurate possible price is worth nearly nothing (and has negative worth half of the time, practically by definition).

On the other hand, Wall Street has been raking in tens if not hundreds of billions in profits from this service. What value we get from more accurate pricing may very easily be offset by these costs a hundredfold.

[harryh]

You are drastically overestimating how much money HFT market makers earn. Virtu Financial (one of the biggest firms in this area) earns about 100 million a year.

I think you are also underestimating the costs to retail investors to not getting accurate pricing. Shaving a few tents of a point off of every trade will have a huge effect on the lifetime earnings of an individuals.

[snark42]

> earns about 100 million a year.

They made 147M in the first quarter of this year. 197M in the first quarter of last year. They might only make 100M/year after costs, but that doesn't represent the 600-900M they take from the market.

[dsacco]

That's not the point. The point is that the industry is vanishingly small compared to Wall Street proper, yet it has an outsize target on its head due to FUD and emotional appeals like the ones presented in the article.

Furthermore, in exchange for "taking" that money from the market, they enhance liquidity, which is directly helpful for price discovery and facilitating trading among both retail and institutional investors.

People are continually moving the goalposts in this thread and others like it. If you're going to talk about Wall Street and fraud, high frequency trading is not the place to start. All of the legitimate arguments against high frequency trading have nothing to do with fraud, they have to do with the dangers of runaway algorithmic trading that coalesces into the same market movements.

But we can't reason about that issue while half the people talking about HFT (almost none of whom actually have experience with trading whatsoever) still think it's front running, or believe it constitutes some sort of fraudulent con over "the little guy."

[concede_pluto]

Liquidity is willingness to make a trade others aren't. To be useful, it has to linger in the order book for a long time. If you're winning a race by milliseconds, you are trying to interpose yourself into a trade that was already going to happen that day.

[auntienomen]

OK, so gross-not-net, Virtu is making about $2M/day. The value traded on a typical day in US stock markets is north of $100 billion / day.

HFT is rounding error.

[snark42]

> Virtu is making about $2M/day. The value traded on a typical day in US stock markets is north of $100 billion / day.

You can't estimate it that way as they don't win or profit on all their trades. At it's height HFT was estimated to responsible 15-25% of daily volume by best guesses (it's some what obfuscated.) I'd be surprised if it was less than 5% today. Not just Virtu of course - all players big and small.

[vostok]

Do you think Virtu takes more or less money from the market than the market makers they displaced?

[uiri]

If one is employing a buy and hold strategy, then it doesn't make sense to perform buy operations for every pay cheque. At the level of a retail investor, making buy trades once a quarter or once a year will do far more for a retail investor looking to have money on market making operations.

A few tenths of a percent is on the order of less than $100/year assuming that a retail investor invests the maximum amount allowed inside a 401k each year (ignoring for a second that typical 401k plans do not permit investing directly in individual stocks and also ignoring catch up contributions for older folks). It's just not a significant amount of money at the level of an individual retail investor.

[rramdin]

Automating the work done by human traders, market makers, and specialists has not only facilitated decimilization resulting in smaller spreads, but also allowed trading fees for the retail investor to reach historic lows (the worst you'll find at a retail brokerage nowadays is about $8/trade, far better than the $35/trade), with many even being free. Wall Street had always been raking in billions in profit from market making activity, if anything that profit margin has been significantly reduced by automating market making.

[stouset]

> ...also allowed trading fees for the retail investor to reach historic lows (the worst you'll find at a retail brokerage nowadays is about $8/trade, far better than the $35/trade

The average retail investor should not be making enough trades for this to matter.

Bringing down the price of trades like this only makes it cheaper for the suckers — day traders — to think they're playing the game. It is of marginal utility for the average retail investor.

[URSpider94]

That's not a fair assessment. Let's say you are doing well and actually investing $1000 per month into the market. Now let's say you are diversifying into three index ETF's, and you buy those quarterly, so that's three trades a quarter on a total of $3,000. If the commission is $35/trade, you are being taxed 3.5% of your investment up-front to get into the market. If the commission is $4/trade (a more typical fee these days), then the up-front loss is 0.4%. You'll pay those same fees again on the way out, and assuming that you sell on the same schedule, that's now 7% vs. 0.8%.

Yes, there's some nice compounding in between, assuming that you buy and hold with no further trades. But, there's a wide gulf between "day trading" and active stock-picking. Assuming that your average hold time is 5 years per stock, you're still going to rack up a lot of commission costs at $35 per trade.

[pdeuchler]

There's no real problem at all to professional investors, they will figure out how to trade at the price they want regardless. It mostly hurts retail investors who rely significantly more on market signals to be correct. Professional investors almost prefer inefficient prices as it provides more opportunities for arbitrage against dumb money.

[rtx]

Whats wrong with them making money from their efforts.

[corporateslave3]

Completely delusional about Hedge Fund profitability.

[cwkoss]

How is mispriced markets a problem? If institutional investors are buying and selling at roughly the same rate, and the mis-pricing occurs in either direction, there will be more noise, but over time it would balance out. Sometimes you'll pay 1% too much, sometimes 1% too little, but it would balance itself out in the long run.

Am I missing something here?

[rramdin]

Not really missing anything, but if you're willing to accept buying/selling 1% away from the "ideal" price, it's hard to complain about an HFT making a penny because you can't back-off when the market is moving.

[harryh]

Your assumption about institutional investors buying and selling at roughly the same rate is wrong. When one firm decides that Microsoft is overprices, a lot of firms are probably going to decide the same thing. Then it's a race to see who can extract the most value out of the market before the price corrects.

[dsacco]

> Am I missing something here?

Yes. By paying relatively small amounts to high frequency market makers in return for enhanced liquidity and price discovery, you won't be overpaying by 1% (or more). I also challenge the idea that it would just "balance" itself out, in the absence of evidence supporting that thesis. In actuality you'd likely just amplify the costs you already have and either fill fewer trades or have higher costs for doing so.

Choosing to lose $1 due to low liquidity instead of a few cents due to market makers is both petty and nonsensical. There are legitimate arguments against HFT, but they don't begin by trying to reinvent economics such as to de-emphasize optimal price discovery.

[matt4077]

as far as I can tell, HFT shops aren't producing anything tangible. Considering almost nothing is as zero-sum as a stock market at sub-second timescales, their revenue is exactly equal to the costs for other market participants. For Virtu Finance, mentioned by another comment, that's around $800 million/year.

That's not really that much in the scheme of things, but it's only one company, and I doubt the other investors would be willing to spend similar on insurance against volatility.

[justadeveloper2]

That's such bs--as if the markets couldn't determine prices at anything but sub-microsecond velocity. No, HFT is the ultimate rent seeking.

[theseatoms]

> HFT is the ultimate rent seeking

It really isn't though. It's been maligned as part of a smear campaign by the actual rent-seekers, Wall Street proper, as other commenters have noted.

[harryh]

It's a bit hard to say to be honest. The wider spreads should make a lot of HFT strategies more profitable. Profitable enough that they can successfully absorb the costs from the tax and not go out of business. You are probably right that this wouldn't be true in all cases though.

[minimax]

Here are some numbers. 0.5% of a $50 stock is $0.25. So to break even on the tax alone you need to sell $.50 higher than you buy. That alone will blow out the spread any market maker is able to quote at. The other problem is that now scratching (you buy at the bid and now it looks like the price is going the other way so you aggress and sell back into the bid for no profit) is also extremely expensive (you lose $.50 per share on a $50 stock just scratching). That's going to really kill your profitability. Maybe someone could figure out how to make it work, but it would be an extremely painful regime for market makers.

[harryh]

Are there really people proposing a 0.5% tax on trades? Jesus. That's 1-2 orders of magnitude bigger than I thought we were talking about. That's crazy!

[minimax]

0.5% on equities was the Bernie proposal. Here I'm assuming that both sides pay 0.5% but even if it's half that (each side paying 0.25% or only one side pays) the numbers are crazy.

[cwkoss]

Easy fix - only tax the takers. I agree the 0.5% is a bit steep on both sides. If only to takers and makers aren't taxed, seems like it could work. Would also probably add a ton of liquidity to the markets.

[minimax]

How is that a fix? A market with huge displayed sizes but no trading (because nobody wants to pay the massive take penalty) is not a "liquid" market.

[dsacco]

> Would also probably add a ton of liquidity to the markets.

What? No it wouldn't. You are disproportionately rewarding makers in this scenario. You would find plenty of listed orders, which somewhat looks like liquidity, but it would not be a liquid market. The end result would be a market that is actually less liquid because no one wants to fulfill orders. It would be utterly lopsided.

[rramdin]

HFTs are almost entirely makers; retail and institutional do almost all the taking, so taxing the takers may not have the desired impact on the industry.

[r00fus]

Does it dramatically increase costs for investors or speculators?

How many times do you trade a year? Actually perform trades? Even including mutual funds, I think it's < 100 yr.

[harryh]

Those mutual funds trade on your behalf every day.