[krastanov]

Isn't the entire point, that the anti-HFT folks are trying to make, that if HFT is abolished then we will still have liquidity? As in "Liquidity is not created by HFT. HFT are just an intermediary between the actual providers of liquidity and the rest of the market".

This is a sincere question, because I really do not understand how HFT "creates liquidity" when they are just buying low and selling high.

[jpmattia]

> This is a sincere question, because I really do not understand how HFT "creates liquidity" when they are just buying low and selling high.

It's a complicated issue, but I think the simplified version is: Reduced liquidity results in larger volatility.

Shorting is an easier example to look at: When a stock drops, folks with short positions cover their bets ("I've made enough money off this position, it may be near the maximum I'll make") they buy. Others notice that there is buying interest etc. However, when shorting is banned, those buys do not arrive and you would intuitively expect the stock to drop further before buyers believe there is money to be made. You could witness this dynamic during 2008-9, when the SEC banned shorting of banks.

[logfromblammo]

They don't. "Creating liquidity" is the weasel term they use to justify making money off of trades that would have happened anyway without their help.

The trade clearing systems themselves create all the liquidity that anybody needs.

If anything, they insititute a tiny tax on larger trades, such that there is a tiny deadweight loss to the market every time they front-run somebody. It isn't enough to be very noticeable on a single asset, but it is a positive and nonzero amount that is destroyed each time, and that can add up. To what, I have no idea.

[harryh]

Did you read the blog post? They aren't "creating liquidity" they are "selling liquidity." And if you're asserting that nobody needs it you really need to provide an answer for the question:

Then why are people buying it?

[logfromblammo]

Maybe they are not spending their own money?

[harryh]

So the people complaining about being ripped off by HFTers aren't forced to trade with them, but they do so anyways because they don't care because it's not their own money? Then why are they complaining about being ripped off?

This comment doesn't make any sense?

[logfromblammo]

If I put $10 into a 401(k) and lose $0.0001 of it because the fund manager didn't bother to protect me from fast middlemen, because it doesn't benefit him at all, am I still entitled to complain?

[harryh]

Sure, but you should complain to the crappy fund manager you hired to do a good job for you not the person who the fund manager was competing against.

You also might want to switch to Vanguard. They do a good job and realize that HFTers have dramatically lowered costs for them and their clients: http://www.cnbc.com/id/49434073

[vbuterin]

They are nevertheless buying higher than everyone else and selling lower than everyone else. Otherwise their orders would never get filled.

[krastanov]

Yeah, but if they (the HFT) are not there the only thing that seems to change (in my naive understanding) is that there is no "tax" on liquidity, but the liquidity is still there.