| HN Mirror

> Evidence for existence of a (il)liquidity premium in the stock market is very weak. What this means is that the market has been liquid enough for a long, long time.

That's not entirely true. Liquidity is often used to mean 'ability to exit your position at the most recently traded price', or something similar. However, i'm using a slightly expanded definition, which means: exit your position at its intrinsic value. The ability to sell your stock for what its actually worth is extremely valuable, and statistical arbitrageurs help you do this.

> Consider high frequency trading. Does it really matter for capital allocation that you can sell your Google stock for a fair price in 10ms instead of 20ms? There are hundreds of PhDs working on algorithms and billions invested into infrastructure to make those 20ms into 10ms, which I'd argue is a byproduct of how exchanges work and doesn't serve humanity in any way.

Here I agree with you, although I think it's important to understand that a lot of high frequency trading is actually making markets efficient. That is to say, the service being provided by HFTs is truly valuable. What is not super valuable is squeezing out that last marginal millisecond. The energy poured into the last millisecond is indeed deadweight loss, but I think the amount of energy being spent there, while very large in absolute terms, is not so large relevant to the financial industry writ large.

So yes, I agree that the competition at the margin in HFT is probably not productive, it is a byproduct of the necessary service that HFTs provide and the dynamics of the environment in which they provide it. I also think that any 'solutions' to the problem of that energy expenditure are likely to make everyone worse off over all, not better. You really want the HFT game to be a winner take all market, in the way that it currently is, precisely because competition is deadweight loss.

If you do things like introduce purposeful stochasticity into order submission (for instance), you're going to make the competitive equilibrium more multipolar, so that instead of one dominant firm taking it all, you have a bunch. And that's actually worse for everyone. What we want is basically 1 HFT firm that is the best and does a good enough job that nobody else tries to compete, and earns a reasonable profit for providing the efficiency and liquidity that they do. I think the competitive environment is actually converging on that, even though it may not look that way from the outside.