| Liquidity refers to the fact that when you want to sell a stock, you can sell it immediately. The more liquid something is, the closer it is to cash. Think about your car -- if there was a public price for your car and you could decide at any moment whether you wanted to sell for that price, or close to that price, that would be a benefit to you. But instead selling your car is quite a chore and you are never sure whether you are getting ripped off or not. A liquid market has a public price and a degree of fairness and confidence baked into that price. In order to provide liquidity market makers agree to buy stocks from anyone who will sell them, and then take care of finding the buyer on the other end. The difference between what they buy it for and what they sell it for is called the 'spread' and it is how market makers traditionally have made money. The spread is also the fair fee they charge for the service they provide, which is liquidity, and the risk they take. If market makers did not know for sure that someone else would be willing to buy the stock right away, that they might have to sit on it, they would be taking on a very large risk. The more people that buy and sell, the less real that risk becomes. HFT makes their money, generally, by front running. Front running is the practice of buying a stock because you know the California Pension Fund is about to buy it, and so you know the price is about to rise. You can immediately turn around and sell it when it goes up. Front running by a bank is illegal, but it is widely suspected that many banks engaged in the practice for years. It is illegal because the bank is supposed to be acting on their client's behalf and in their interest, so when they are trusted to place the order, they first buy some of the stock for themselves or for the bank's inside funds. It is basically insider trading. When HFT engages in front running, they have detected that an order is coming down the pike, and they jump in front at the last nanosecond. The reason they spend so much money trying to do this is because it is essentially fool proof when done correctly. You can argue that by not taking any market risk, and not holding the stocks, they aren't providing liquidity, they are parasites on real stock traders and they are essentially using inside information. But its not that cut and dried because there is almost no way to eliminate the problem. At least HFT reduce the time window during which someone's signal to purchase something can be exploited. It used to be that humans managed all of this. Large brokerage houses would be responsible for executing these trades, and it was common practice for brokers to tip each other off when they received large orders. These tips were very valuable because they guaranteed a winning trade. If you ever wondered how meat-head frat boys could make millions of dollars on Wall Street despite not being especially intelligent, this was a big part of it. At least now the people who are scalping everyone's orders have to be brilliant. |
This is not possible.