And I do completely understand the argument for liquidity: more transactions = more accurate price discovery. But I think problem here is that this entire field is black box, meaning property trading algorithms and trading patterns can and are used within the system. This can allow a trading AI to go out into the market place, look for pattens, and to create and cancel millions of orders within the fraction of a second.
I'm sure you know about the former Goldman Sachs programmer who was charged with theft by the FBI. It was totaled at around 32 megabytes of software code. Not very much. But Goldman insisted that if this code got out into the market it would be detrimental to their business and violate their trades secrets confidentiality clause. Not to mention Goldman's largest profit center in their business is their proprietary trading desk, which is heavily into HFT.
My contention is that if we are really interested in a utility that uniformly benefits the market, then let's have an open source platform that provides that, so we can verify that any of these firms aren't "front-running" their trades.
Thats my opinion. I think a lot of the debate over HFT is just filler, it doesn't matter. The guys who are hip to the scene are already making a killing on it now, and it may last a few more years before we begin to regulate.
Colocation agreements usually require a minimum commitment of 12-36 months... probably $10k/mo if you have some rudimentary failover and the like.
I'd say anyone who tries with less than 12 months and $500k to truly burn has 0 shot at success. And if you want to really do it right, you're looking at an order of magnitude more.
Does the fact that Kinkos invests millions in fancy printers make the photocopying business unfair?
But they would have been filled at the price they desired if they sold directly to the big order, as well. The end effect of the hft systems is just to run up the big order to the max of what they're willing to pay, and take their profit as the difference between that max and the original offer (split up between however many of these things managed to make it over to the feeding frenzy before the real buyer got what they wanted).
I don't need to justify my activity, nor do I want to go that route--my point is that the fact that participants can realistically expect a fill is not something that happens because of magic.
You make the same assumption yourself, every time you trade. The entire purpose of high frequency trading is to beat others to good deals -- not to do a better job of discovering good deals.
I'm fairly sure this is the answer: They don't -- instead, they're just good at noticing, very quickly, the actions of the market actors who do. Which is just another way of saying that they're about beating others to the deal.
(I'd also guess that they're probably also quite good at handing recreational day-trader's asses to them.)
If you look at markets through an information-centric lens, it seems possible to draw a clear distinction between actions that introduce external data and those that are pure acts of deduction, no matter how brilliant.
(so speed is important to you, just as water is important to a fish; it may not be what you focus on, but that doesn't mean that it's not critical).
There are market participants who make their money on pure latency arbitrage; it is a 100% speed game (because anyone can figure out that 1 - 1 = 0).
The majority of HFT falls into the "you have to be fast enough to not get run over" bucket.
The question is, why can't the buy and sell orders be matched directly, allowing the buyer to pocket the discount off the price he was willing to pay, instead of the difference going to an HFT with access to the incoming order stream? What possible benefit is provided to the market by skimming off the difference like this?
The behavior I talked about above is one of the objections to HFT as it's currently practiced, and I'd like to know whether it reflects a misunderstanding.
In terms of you justifying HFT activity, of course not. There have always been advantaged participants and HFT traders are simply those today. But the article was trying to justify HFT as manna for all participants, which seems unlikely considering how much money the industry is extracting for their liquidity-providing services.
So I've not read the linked article, nor am I going to. But I will say this: HFT does perform a viable, necessary economic function. A well-functioning capital market absolutely requires this kind of activity.
HOWEVER, like most mainstream-media memes, what gets talked about / opined on is almost never relevant to what is actually important and/or controversial: in this case, the question of whether HFT creates a two-tiered playing field where individual (read: non-technically-sophisticated) investors suffer at the hands of the "pros".
Most arguments against HFT basically say that algorithms are purely predatory and only serve to hurt the performance of large investors. This is naive at best and deceptive at worst; for every share I purchase "ahead of" a big order, a seller has been filled at the price he desired. Every transaction has two sides; you can't just pick one and say they got screwed. The other side has to have done as well as the other did poorly (assuming a fictional frictionless world).
The reality is that HFT requires tons of knowledge and a technology budget of seven figures per annum at the barest minimum, and this provides a very real barrier to entry. What should be talked about, but never is: is that ok? Why or why not? What ramifications does it have?