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by gaius 5385 days ago
Well, party A says "I will be hurt if the price of this asset falls" and party B says "Well, I don't think it will, so if you pay me a smaller fee upfront, I'll cover any losses you make for the next T time". Multiply by thousands of assets (which a big mutual fund may well hold) and thousands of updates a second as everyone else in the market trades to their own ends, and you have the essence of HFT.
1 comments
davidw 5385 days ago
The material facts that stock values are supposedly based on do not change 1000's of times a second, though - it seems like it's trading for the sake of trading, rather than trading to best distribute goods and services to where they're desired and will be most effectively used.

One thing is deciding that IBM has a brilliant future and that the stock is a steal at the current price, and trading with someone who feels the opposite, another entirely to have thousands of transactions a second. Even the former transaction seems a bit zero-sum in that one of the people involved has the wrong idea and is going to either lose money or lose potential money.

That said, maybe I'm missing something - I don't know that much about HFT and stocks/finance in general, so I don't claim to have everything figured out.

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gaius 5385 days ago
Yes - but the risk experienced by a portfolio does change thousands of times a second. Once every time every underlying asset is traded in fact.
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_delirium 5385 days ago
It's not clear to me that the financial system as an enabler of liquidity/commerce/trades/etc. would be significantly worse if the granularity were slightly reduced, though. Say, run exchanges in a discrete-time world of 100ms timesteps. Are there real-world use cases where this would make the finance system unable to facilitate the economy?

If there are ways to make profit by trading at sub-100ms resolution, but a 1ms-resolution exchange is not any better at facilitating the outside-finance economy than a 100ms-resolution one would be, then it seems like HFT is solving problems of the exchange's own creation. It could even genuinely be solving those problems, but if they're problems that only arise in the context of extremely-high-granularity exchanges, and there is no practical benefit to such high time resolution, then why not just axe the problems?

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