[tptacek]

The "high frequency" in HFT compared to human traders is a little like the "high fructose" in HFCS compared to table sugar. To wit: "high frequency" changes the relationship of HFT to other sell-side traders; it's what allows HFT shops to potentially outcompete human market-makers.

However, it's the category of sell-side traders in general that matters for liquidity.

You're using imprecise language here (for instance, referring to market makers as "investors"), but the clear implication is that you believe that normal, "buy-side" investors provide adequate liquidity. But they don't, and we know that, because the more competitive the sell-side gets, the lower spreads get.

[pdonis]

> you believe that normal, "buy-side" investors provide adequate liquidity

Well, of course that depends on how you define "adequate". What is all this incessant trading of stocks for? What value does it provide? For example, if I'm an investor (a "real" one, not a market maker, to use less imprecise language) with a long time horizon, something like 30 years, because I'm saving for retirement, how does HFT make me better off?

[tptacek]

One obvious benefit of "incessant trading of stocks" is that buy-and-hold investors can move in and out of a position for much less than they could in the 80s. The "incessant trading" reduces costs, which can be very important even to value investors when there is some extrinsic prompt to trading.

[pdonis]

> buy-and-hold investors can move in and out of a position for much less than they could in the 80s

In other words, brokerage fees, or the equivalent, should be lower, so the overhead to execute a trade is lower. That has some value, yes, but not a lot, because a buy-and-hold investor, of course, doesn't execute many trades, so the overhead cost of executing trades is already pretty small for him.

Also, most "buy-and-hold" investors hold mutual funds, not stocks, which changes things. See below.

> costs...can be very important even to value investors when there is some extrinsic prompt to trading

Yes, but as I just noted, most "buy-and-hold" investors are holding mutual funds, not stocks, so they aren't paying the direct costs of stock trading anyway. When I want to rebalance my 401k, I don't trade stocks, I trade mutual fund shares, and they're all shares of different funds offered by Fidelity or Vanguard or whoever my 401k provider is. (And with most 401k's, certainly with the ones I have, as long as you don't rebalance too often there is no fee for rebalancing.)

So decreasing the overhead cost of trading will only appear to me, if at all, as a decrease in mutual fund fees; but with most 401k's the individual doesn't see those anyway, because they're provided through employers. I don't know how much the fee question affects the negotiations between employers and mutual fund providers for setting up 401k's, but in any case that's at least two layers of indirection between me as a retirement investor and the overhead cost of executing individual stock trades.

So I can see some small benefit, yes, but is it enough to offset the high social cost of having so many smart people doing HFT instead of something more productive?

[tptacek]

NO. Not "brokerage fees".

Whatever you pay to your brokerage, you pay on top of the spread. The spread is what you pay to place a market order.

In exchange for the privilege of buying right now, you pay the best offer price. In exchange for the privilege of selling right now, you pay the best bid price.

It's a commission you pay per share; the more shares you try to move, the more you pay whoever's providing you the liquidity.

[pdonis]

> Whatever you pay to your brokerage, you pay on top of the spread. The spread is what you pay to place a market order.

I agree with you for the case of a "buy and hold" investor buying or selling actual shares of stock (with the proviso that the overhead to such an investor is already pretty low since he doesn't execute many trades, so the gain to him from something like HFT decreasing the bid-ask spread is small). But as I noted, many, probably most, "buy and hold" investors hold mutual funds through 401k's, not individual stocks.

For example, I have a 401k. I don't place market orders. I rebalance my portfolio every so often, which, after a lot of intermediate steps, might result in some mutual fund manager placing a market order. But I don't see any of the direct costs associated with that, whether it's paying the spread or anything else. I only see the net overhead of the mutual fund as a whole. (And, as I noted, for a lot of 401k's, like mine, I don't even see that, because the 401k mutual funds are no-load.)

[kasey_junk]

The ability of your mutual fund to provide low fee investments is directly related to their execution costs to trade to rebalance their portfolio.

Whether it is a direct line item on your prospectus or not is immaterial. No load mutual funds are more successful when they have lower execution costs. The biggest driver to low execution costs is an electronic market and then the bid/ask spread. HFT enable both of those low costs.