I agree. I've always thought of HFT as a way to let liquidity flow between exchanges, with a payoff equal to the degree to which the inter-exchange spread has been decreased. If the inter-exchange spread is wide, there is some value to be extracted from that spread, and HFT provides the (in my opinion) valuable service of extracting that value, making the market more efficient as a whole. The more people that are competing in that market, the smaller the value the HFTs can extract, until the actual market participants on the exchanges are only paying fractions of a penny for the privilege of buying shares "originating" from another market that has higher liquidity. I can't really see how this could be a bad thing (given enough competition).

Well, here's the NY Fed explaining why they think it's bad:

http://libertystreeteconomics.newyorkfed.org/2015/10/the-liq...

You have summarized it perfectly.

> HFT is fiercely competitive

For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club.

> Without HFT, bid offers would be wider. Fact.

The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact.

The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.

At what point in the history of the public markets in the United States was market-making of any sort not an activity reserved for an incredibly small minority?

The difference, from what I can tell, between the HFT "elite" and the human market-maker "elite" is that the human elite actively colluded to retain their status. Compare the largest HFT firms to the largest investment bank, and the number of entrances and exits in the market for electronic trading firs.

Marketing making != HFT. HFT is simply trading like market makers, they're not making markets.

Can you be more specific about the distinction you're trying to draw here?

Market makers have obligations to maintain a two sided market, in all market conditions.

HFT have no such obligation, and so, when there are rapid shifts in prices, may just wait out the chaos.

HFT gets the benefit of taking the spread, without having to pay the cost of ensuring orderly markets.

http://nysearcarules.nyse.com/pcx/pcxe/pcxe-rules/chp_1_1/ch...

There are market makers, and there are Market Makers. In practice, the registration may simply be a formalization of an existing trading system, or a very light obligation on top of the existing system.

From the document that you listed, it looks like NYSE Arca has a requirement for 100% continuous quoting, but the quotes can be 8% away from the current market price (section 7.23.a.1). This is basically a free pass; nobody wants to trade against a quote that wide. For reference, take the most liquid ETF: SPY trades above $150 and regularly has a $0.02 spread, one THOUSAND times tighter than the 8% requirement.

On other exchanges, there are requirements for tight quotes, but they usually come with relaxed requirements on quoted time. For instance, maybe a market maker could be required to quote "90% of the time within a 0.5% spread". In such a scenario, allowing market makers to pull quotes for 10% of the day is basically giving them a free pass on the most volatile points of a day.

I have seen very few situations where registered/designated Market Makers are obligated to suicide themselves to provide liquidity; there's usually an "out". In practice, the top-tier HFT market makers (de-facto) are already exceeding the obligations required of Market Makers (registered).

Retirement savers are not churning their portfolios and are thus not paying anything to HFT. Not a strong argument.

Making money making markets takes risk capital. i.e. Money. The money makes more money. Fact. I agree. But don't blame HFT. Blame finance. That is how finance works. I see a completely legitimate case for being anti-finance. I don't see a legitimate case for being anti-HFT only. Indeed, the opposite, if HFT reduces the bid/offer paid by the average retail investor. Which it does. Fact.

Do you know who hates HFT even more than the general public? Human market makers. I think that says more than any of my arguments.

Retirement savers are losing a cut of every paycheck to HFT when they go and add to their account. Likely multiple cuts if they've diversified. It's basically a tax you pay for not having the best access to the fastest server closest to the database.

They are not. The largest, best-regarded fund manager in the world (Vanguard) is on the record saying that they've benefited from HFT.

Link?

HFT on average narrows the bid offer. Retail (i.e. small) investors benefit. Human market makers lose out. Without HFT your little old lady retirement angel would be paying much more to a rapacious human market maker.

The point is that it is not the end users who are getting hurt. It's the old monopoly - the human market makers.

DISCLAIMER: I (was) a HUMAN market maker.

It's not a tax, it's the price of immediacy. You can either work your orders yourself (which doesn't in the least require speed), or you can pay a concession. It has always been this way and always will. HFT has made that concession the lowest it has ever been for the vast majority of market participants.