I think thats an overly simplistic view of things. The market is big and many participants trade at different frequencies. Large pension funds need liquidity to move big blocks of stock for their quarterly and monthly rebalances, and the big medium term statistical arbitrage traders provide liquidity for them to do so. HFT players provide liquidity for the stat arb players. The classes of participants with different frequencies actually help one another, while there is competition for alpha within strategies with similar holding periods. Overall the system creates an extremely efficient and liquid system for valuing and exchanging equity - the very system that empowers YCombinator and other Venture investors to make VC investments knowing that their winners will eventually IPO or be bought by public companies.
Many HFT jump out when things get volatile, when liquidity is actually required.
Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. The costs required to compete at the lowest latencies are large, and forcing small/medium players out the game, as the investment cost is large, which is also bad.
The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.
My initial comment was discussing speculative trading in general, but since you mostly brought up some common anti-HFT tropes I might as well address them.
> Many HFT jump out when things get volatile, when liquidity is actually required.
Do you have a citation on that? If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets.
> Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero.
HFT is a mature industry. Latencies have mostly stabilized, and profitability is way down in the last few years. Many firms are merging/consolidating. So in the past few years society is actually spending fewer resources - both financially and from a human capital standpoint on HFT than it did in the past.
> Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world.
IEX is doing something relatively similar to that for a few years now. They have ~3% of US equities market share. People have the option of trading there but they mostly choose not to.
> The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.
Due to consolidation, costs are actually decreasing. Could it be that the market is... working?
> If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets.
You were replied to, but I'm going to ask some questions of this moralizing.
> Many HFT jump out when things get volatile, when liquidity is actually required.
This feels almost like a "no true Scotsman" situation. Why is liquidity not "actually required" when volatility is low? Is it a moral obligation for any trader to catch a falling knife? I see this condition of "when liquidity is actually required", but I never understood why there was such a strong feeling for it. Why do you believe this?
> Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero.
I don't know, I could probably take a similar view of so many jobs in tech. What does society really get from Snapchat, what do they get from HQ Trivia, what do they get from people making powerpoint presentations with arrows that point to synergies. What's the point of any job with some amount of abstraction?
> Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world.
Why?
> The system is hugely inefficient
Do you know how efficient the system was before HFT started up? And, do you know how many people were working in trading before, and how many are, for a similar fraction of stock volume?
> Do you know how efficient the system was before HFT started up? And, do you know how many people were working in trading before, and how many are, for a similar fraction of stock volume?
Again this weirdly mixes HFT with electronic automated trading, which I really don't think anyone in the domain would readily mix.
HFT by arbing over latency is entirely different to the automation of boring trader tasks that see less people employed to do the same thing in the front office.
I can't continue this more, it's just blind allegiance from people who are clearly not in the domain.
That's overly simplistic. While the overall system may be zero-system over an infinitely long time horizon, this doesn't typically matter in practice. It can be positive sum for participants over some time horizon they care about.
For example, an HFT trader make pennies from each trade by exploiting tiny price inefficiencies. He essentially takes money from a "stupid" retail investor who does not know how to optimize his trades. However, the retail investor may not actually care about optimizing trades and just wants to liquidate assets or make a long-term (10+ years) bet. He is totally fine with throwing away a few dollars because optimizing his trades through complex algorithms would be too much work. Here, both parties win, the HFT trades gets paid because he provides convenience, or liquidity, to the retail trader. The same would apply to any human market maker, it doesn't have to be HFT.
And yes, HFT liquidity may disappear during HUGE market movements due to risk, but it doesn't disappear as long as both parties get what they want and the risk is manageable, which is "most of the time". Of course, HFT has other issues such as the race to zero and unfair advantages for a few central players, and I don't want to defend HFT. But saying that "it's all zero sum" is not correct.
An analogy is your nearest grocery store. They're a market maker because they buy from the manufacturer and sell to the consumer and profit from the spread. Do you also argue that these are all zero-sum and we should cut them all out and connect all consumers and farmers directly? And their liquidity also disappears when black swans (corona) happens :)
Melon Usk (say) wants to make cars, but he can’t pay for the factory himself, so he forms a company, sells shares in it, and uses the proceeds to build a factory. Now he and his shareholders can make cars, so the shares are worth more.
this would only be true if it was a closed system. the central banks essentially magic money into existence and put it into the market through convoluted methods.