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by ladberg
25 days ago
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> First, this definition has always been circular: what’s the most accurate price? The one the market comes up with. More market, more accuracy! Market makers and HFT don't determine price: price is usually purely determined by the net inflows and outflows as decided by humans. MMs just smooth it out over time so everyone gets good pricing at the time and in the size they want it. > Second, there is never any reconciliation of the costs society is saddled with in order to chase arbitrarily more accurate prices By definition market makers are earning a fraction of the price improvement they provide, ergo the costs to society have to be less that the benefits for better pricing for the companies to stay in business! > Third, as an index investor, I more or less couldn’t care less As an index investor you should absolutely care! How do you think you are able to buy into the fund at a reasonable price? And then how do you think the fund is able to rebalance without transaction costs destroying performance long-term? |
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By definition, they’re making in aggregate essentially whatever the difference was between the “misprice” and the “true price”, assuming sufficient belief in both of these things. One of the parties in the hypothetically mispriced trade is bearing the loss. Their cut had to come from somewhere.
> As an index investor you should absolutely care! How do you think you are able to buy into the fund at a reasonable price?
You are relying on an interpretation of “reasonable” to intuitively mean “cheap” when in reality it means “accurate” in this context.
As an index investor, as long as it is accurate enough I don’t care. Any mispricing of assets up and down will come out in the wash.
Index funds existed well before HFTs were endemic. I have seen zero evidence that HFTs have caused index funds to net more of the gains from their underlying indexes.