|
While I'm generally pro-HFT and market making, I'm seeing some comments that are equating market making and high frequency trading. They're not the same thing. As an HFT firm, you can have two kinds of strategies: Liquidity providing and liquidity taking. This article calls these two strategies market making and "being an aggressor" in the "Strategy Zero" and "Survival!" sections. The HFT describes their aggressor strategy as follows: "Mr. F., one of the original hires, coded what we called Strategy Zero. It was simple: have no position, wait for an option edge of a reasonable size, at least a tick. Then, hit it. Wait. Dump it out and take a tick profit." In this case, the strategy involves 1) seeing that you can buy a security at $10, 2) knowing that the security is actually worth $10.01 and will move to this price in a few seconds, 3) lifting someone's $10 offer, 4) waiting the few seconds for the market to move, and 5) hitting someone's $10.01 bid for a $.01/share profit. This liquidity taking strategy is not similar to a liquidity providing strategy. Liquidity providing is leaving orders on the order book for anyone to take and gaining money from one person who buys your shares for $10 and from another who sells shares to you at $10.01. This involves more risk to your business. I think that if you want to debate the merits of whether working at an HFT firm is an actually useful service, you have to look at how often the HFT firm provides liquidity versus takes liquidity. Providing liquidity more obviously tightens spreads and improves prices, as you can't be a successful liquidity provider unless you provide the best prices first. Liquidity taking, however, involves lifting orders from exchanges that you know are incorrectly priced, which seems to me like a more obvious "bad" (or at least less good than liquidity providing). |
I think you have that backwards. If you always sell at $10 and buy at $10.01 you lose on every trade.