[downandout]

2. The only reason that Jill has a speed advantage over Jack is because she has paid for it! She has paid to co-locate her server at the exchange, and she has paid to use high-speed connections between exchanges. Are we going to declare that paying for a competitive advantage is suddenly immoral?

Here's the problem with that: the number of available ultra-close connections to the market is finite. If you carry this out to its only possible conclusion, whomever has the closest connection always wins, and everyone else always loses. The other market participants eventually realize that it is simply not possible for them to win, and that a closer connection is not for sale at any price, so they simply stop participating. This solves one problem - people stop losing money - but also destroys the market.

[throwaway283719]

It's empirically not true that "whomever has the closest connection always wins and everyone else always loses" as is evidenced by the fact that there are multiple competing market makers who are all profitable.

Arguments of the kind "let's carry this to its logical conclusion" are almost always fallacious, because they ignore limiting factors, or alternative explanations.

If your only advantage is speed then you need to have the fastest connection to the exchange, else your business model doesn't exist. If you have other advantages, then speed is less important. Nowadays there are very few market makers whose only advantage is speed, because most of them realized that continually paying through the nose to compete on speed is a mug's game.

[downandout]

>there are multiple competing market makers who are all profitable.

That doesn't disprove my statement. The "multiple competing market makers who are all profitable" all have extremely fast connections to the market. They compete on relatively equal footing speed-wise, and so other factors come into play. But everyone outside of the small group of players with that speed advantage will always be paying a tax to those who do. And good luck compensating for your lack of speed by out-predicting large teams of MIT-educated quants with unlimited technology budgets. As an individual investor, your only hope for profit is that market values of the stocks you invest in rise by more than the tax you have to pay to HFT's. You better buy and hold, because with every transaction, you're paying them an additional tax.

When market values are rising, these effects go unnoticed because everyone is generally making money. That doesn't make the tax we are paying to these HFT's any more fair or less damaging to the market.

[kasey_junk]

You aren't paying a tax to HFTs. You are receiving a substantial discount to trade due to them being there. Fees are lower than they've ever been, spreads are tighter and technology is cheaper. You are in fact reaping the "peace" dividend of the HFT wars.

[growse]

This is obvious for any market that has a single physical location. People who stand next to the apple seller get local apple price information faster than those standing in the next town.

You've also got a very peculiar definition of winning. A person who wishes to buy 10,000 Ford shares who places an order at $17 only to find that in the meantime the market has shifted to $17.01 and therefore purchases at that price hasn't "lost". They set out to buy Ford stock at market rate, and that's what they ended up doing.

[downandout]

>You've also got a very peculiar definition of winning

Not really. The stock market is a giant pool of money. These parasite traders are nothing more than leaks in that pool. With enough of these leaks, the pool runs out of water. Additions of water to the pool (through a combination of rising market values and more investment) at various times will overshadow the effect of the leaks, but they are there nonetheless.

A person who wishes to buy 10,000 Ford shares who places an order at $17 only to find that in the meantime the market has shifted to $17.01 and therefore purchases at that price hasn't "lost"

Actually, they have lost. They lost 10,000 pennies, or $100, and received absolutely no value in return. That money is gone, never to return, into the pocket of an HFT. It has simply evaporated from the market.

[growse]

What does this even mean? "Eventually the pool runs out of water". What?

Last I checked, the stock market was a market. Anyone is allowed to play, and like most things in life, you can pay to upgrade (either your connection, your analyst talent, etc. etc.). Look at the recent Barclays dark pool fiasco to find out what the liquidity in a market without HFT and transparent books looks like.

[downandout]

>What does this even mean? "Eventually the pool runs out of water". What?

Well, when you have a pool, and water is constantly being sucked out of it, even a tiny bit at a time, eventually you will have no water left in the pool. Not a hard concept.

[kasey_junk]

But your analogy is backwards. HFT (of the market making variety) are putting water into the pool, not taking it out.

[downandout]

It's not backwards. Market making HFT's are like a casino's bankroll. The only purpose that their bankroll serves is to suck money out of the pool.

[industriousthou]

I'm pretty sure he was asking how that concept applies to financial markets.

[cscurmudgeon]

Exactly. The poor hardworking people who get to invest in the stock market should have all the benefits of liquidity without paying for it.

[downandout]

Right, because without HFT's there would be no one investing in the markets at all.

[harryh]

Most dark pools that exclude HFTs fail to get off the ground because they are unable to offer the liquidity that investors require.