[Dilpil]

If investment banking is so needless, why did the economy falter when lehmen brothers went bankrupt?

If high frequency trading is so needless, why does the entire market go into shock when the traders panicked and left on may 6th 2010?

Most importantly- if these products are useless and harmful, why do people keep buying them?

[prodigal_erik]

> If high frequency trading is so needless, why does the entire market go into shock when the traders panicked and left on may 6th 2010?

Because HFTs, who enjoy the privilege of walking away from the market at the worst possible moment, had largely displaced traditional market makers who make expensive commitments not to do that. Nobody specifically chooses to do business with them, they're exploiting flaws in the way trades clear to front-run them and become unwanted middlemen.

[yummyfajitas]

...they're exploiting flaws in the way trades clear to front-run them and become unwanted middlemen.

Could you explain the mechanics of how this works?

Near as I can tell, the only way to become a "middleman" is to offer a better price than your competitors or to offer the same price at an earlier time. Is there a "front-run my competitors" FIX command I'm not aware of?

[prodigal_erik]

http://blog.themistrading.com/wp-content/uploads/2009/01/tox... describes a predatory algorithm deliberately making inconsequential trades solely to discover a buyer's limit, then selling short at that limit only to cover after the dip they themselves caused. This is basically scalping, a strategy designed to steal the surplus value from both the buyer and seller. Such abuses were even more egregious back when most exchanges offered flash orders, which is more like poker with certain players allowed to see your cards.

When a HFT buys and sells with a holding time in milliseconds, they are in no way guiding the correct allocation of our economy's resources, they are merely bleeding those who are. That they can do so profitably is showing us what we should fix about the way trades clear.

[yummyfajitas]

Huh. So basically, before HFT, the clever institutional trader could use HFT techniques to buy a bunch of shares from less sophisticated retail investors at $20.00 in spite of high demand.

On net, the institutional trader is gaining $0.01 at the expense of retail investors.

Now, in a world with professional HFTs, the institutional investor can't do this as easily and must pay the retail investors $20.01. How horrible!

It's hard to see why you are calling the HFT an "unwanted middleman". I mean sure - the institutional investor would love to keep taking money from the retail investors. But the retail investors want to keep their pennies - they certainly want the HFT to be present.

As I said, the only way to become a middleman is to offer a better price than your competitors.

[secretasiandan]

Can you tell me more about these commitments and what makes them expensive?

No one may explicitly choose to trade with HFT firms, but that doesn't mean they don't value their presence

"Although Vanguard does not engage in "high frequency trading" and does not operate a "dark pool," we believe much of the public concern over "high frequency trading" is misplaced and believes such activity, appropriately examined, contributes to a more efficient market that benefits all investors."

http://www.sec.gov/comments/s7-02-10/s70210-122.pdf

[yummyfajitas]

He is probably referring to NASDAQ market makers, who are obligated to have a quote at the NBBO at least 10-15% of the time. Of course, there is no obligation that their 10-15% include the 1 hour or so of the flash crash...

[secretasiandan]

I really just wanted him to describe why he thought that obligation was "expensive"

[rbarooah]

If brain tumors are so unnecessary, why do people die from having them removed?

[chopsueyar]

Most importantly- if these products are useless and harmful, why do people keep buying them?

I could not tell if you were talking about finance or cigarettes.