>Please help me, what real value does an investment like this yield for the economy as a whole?
The argument usually goes like this: HFT firms provide liquidity for the market; they are usually the people on the other side of the trade when a retail investor buys stock/bonds/etc. So without the HFT firms, you wouldn't be able to trade at a good/fair price according to market conditions. Furthermore, if you buy stock from NASDAQ or NYSE or London stock exchange, you should get the same price. This idea that you should pay the same price for an asset regardless of where you buy it is enforced by HFT firms, as outlined in the article. Clearly, HFT firms need to get paid for this service, so retail investors typically pay the bid/ask spread.
Isn't the liquidity only worthwhile at times of low liquidity? The ability to quickly exchange shares only matters at times when you want to exchange shares quickly. The only time when you care about exchanging shares quickly is if the price is changing quickly. Those are exactly the times when HFT is the riskiest, and the most likely to be shut off to avoid losses. (For example, shutting off HFT as a response to the 2010 flash crash[0].)
I get the argument, but it feels like the societal benefit is taken away whenever it is needed, and paid for only when it isn't needed.
I don't think I get your point. Correct me if I'm wrong but it seems to be that you're suggesting that if I want to sell some of my shares, for example, that I should wait until volatility is low?
If I had a way of knowing when the market would have low volatility, I'd throw away the shares and become a billionaire trading options.
Saying you should wait for low volatility before trading is equivalent to saying you should wait until the price is high before selling. Both statements seem to reflect common sense but neither piece of advice can be translated into an actual strategy.
The impact of HFT market making isn't that difficult to observe - all markets which have attracted such participants have seen huge falls in spreads. The spread is a tax on everyone who buys and sells in the market so lower spreads are good for everyone. (For example the cost of buying and selling a DAX future before fees was about 70 euro just 15 years ago while the spread is now typically less than a euro.)
> Isn't the liquidity only worthwhile at times of low liquidity?
No, because liquidity is also about tighter spreads. Since the spread is effectively a transaction fee paid to buy or sell on exchanges, shrinking it is beneficial to most market participants.
I've never liked this explanation because most HFT is just front-running. The liquidity is there already, they're just shaving their cut off the top in most cases because they can move faster than everyone else.
Would you be so kind to explain to me in what way a HTF can provide "liquidity", especially liquidity that would not be there in the first place?
By the way, since the tremendous inflow of cash into index ETF, some stocks are bascially traded only by ETFs and HTF without many other market participants. I mean, what could possibly go wrong?
HFT market makers can quote tighter spreads because they take on less risk. They can take on less risk for some combination of two factors: their speed, and the accuracy of their trading models. Depending on the firm, a different trade off is taken, with some executing obvious strategies the fastest, and others operating at a relatively slow pace, but using much more complex and nuanced strategies. Since market makers quote orders on the book much more often than taking orders off the book (takers have to pay and makers get paid on almost all exchanges), they provide tons of liquidity.
For most securities, there are very few natural buyers and sellers of a security, so they would find it very hard to transact without an intermediary market maker.
All electronic market makers are HFTers compared to regular market participants, but they run a very diverse set of strategies, with some operating at much closer to human speeds when compared to the fastest of the bunch.
Market makers provide better price and execution than traditional human market makers, and are a net positive to the market ecosystem, at least in regards to retail investors (the institional traders do sometimes get fucked).
Much less, and it was more expensive. The total cost of market making has gone down substantially with HFT, mostly because a small firm replaces a large army of floor traders.
I don't get it. Reminds me of a blog post were the guy discussed a Portuguese stock, construction industry if my memory does not fail me, that has a "very low" trading volume.
When I looked up the stock, (I think the stock was very expensive), trading volume was like 1 Share every 6 months or so. Yes, I guess you could call this "very low" trading volume. So where would HTF come in here?
Front-running usually refers to a fairly specific scenario in which a brokerage or fiduciary executes orders as principal prior to dealing on behalf of their client so as to benefit from a market movement they anticipate will be caused by the client's orders.
This is categorically not what HFT firms are doing.
While this argument holds some merit for intermediaries in general, it provides no argument why boring a $300M hole in a mountain for a 3ms speed improvement adds any value.
Two people on a hike see an obviously hungry mountain lion in the distance running towards them.
One of them quickly starts changing his hiking shoes to running shoes; to which the other responds “do you really think these shoes will let you outrun the mountain lion?” To which the first responds: “I don’t need to outrun the mountain lion, I only need to outrun you”
Whether it’s 1ms or 1s makes no difference; for a class of strategies, any time advantage can tilt the average from “unprofitable” to “profitable” when you are faster than others - and the sums changing hands are huge (trillions notional or even thousands of trillions per day). A tiny advantage easily translates into a lot of money.
The people who bored the hole were paid a wage that allowed them to support their families. The company that made the boring machine received more capital to develop better machines. The company that made the fiber employed thousands of workers and engineers who are advancing the state of material science. The engineers who built the optics are furthering our ability to drive down the cost high speed data transmission. The provider operating the circuit is paying hundreds of employees and engineers who build out new infrastructure for other customers, universities, businesses. The HFT firm can now build a datacenter outside of the metro, freeing up land to house residents in the city. Banks can take advantage of the liquidity to reduce transaction risk and offer lower rates on financial products to customers. Customers who spend less on loans and credit have more money to spend on other things.
This process goes on, and on, and on. It’s why capitalism is so effective as an economic system. And also the reason why things that may not seem like they produce value actually produce extraordinary value for society.
By that argument, any kind of "make work", doing something pointless, provides value to society as a side effect.
For example: Consider a job going to the office to write on pieces of paper and then throw those pieces of paper into the incinerator so nobody will ever read what was written.
Sounds pointless. Is it "providing value"?
By your argument yes: All those people were paid and can now support their families. The paper makers made paper and advanced the state of the art in fine paper-making, as did the pen makers and the ink makers. The incinerator is looked after, and it keeps new incinerator designers in work. All the fuel which is mined to run the incinerator keeps miners busy. All the commuting to the office and back keeps train operators busy.
And yet, going to the office to write things on paper and then destroy them repeatedly does seem rather pointless.
It doesn't. These kinds of actions are entirely competition between HFT firms (the fastest ones get the biggest share of the pie). But the HFT firms as a whole do provide a service to the market, and at a much lower price than the alternatives, even with the apparently extravagent cost of these efforts (mainly because it requires a lot less people: old-school market making involved a lot of people on trading floors).
"Market maker" refers to a "role" in a market. HFT is simply one way that role is fulfilled, in some markets (equities, futures, ...) but perhaps not others (corporate bonds, MBS, ...). No market needs HFTs to provide the service, but they exist because in those markets they provide a monumentally better (cheaper) service than their predecessors.
The argument usually goes like this: HFT firms provide liquidity for the market; they are usually the people on the other side of the trade when a retail investor buys stock/bonds/etc. So without the HFT firms, you wouldn't be able to trade at a good/fair price according to market conditions. Furthermore, if you buy stock from NASDAQ or NYSE or London stock exchange, you should get the same price. This idea that you should pay the same price for an asset regardless of where you buy it is enforced by HFT firms, as outlined in the article. Clearly, HFT firms need to get paid for this service, so retail investors typically pay the bid/ask spread.