In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.
> the space is commoditized and controlled by a few firms
Few firms != big firms
whats that mean?
so what are quants on the street doing now?
Seriously, I hear this all the time, but it’s only one step removed. Why does everybody keep repeating this lie?
HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down.
Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed.
Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year.
Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.
Mostly human traders/market makers in short.
Nope. Retail traders get better prices; it's the big hedge funds that lose.
> Who do you think buys the mutual funds that pay a higher price.
The big index funds are paying a lower price.
> Why does everybody keep repeating this lie?
Because it's true.
And that's the reason. Market makers (and especially HFTs) profit from razor thin spreads on predictable orders, but they can lose money when they get hit by a big unpredictable order, so they avoid them and/or charge them more. A hedge fund's order is inherently dangerous to a market maker, because they have no idea before the fact if the hedge fund is just offloading 1k shares to rebalance their risk profile, or if they're liquidating their entire position, or taking a big short position. Hedge funds can change the entire market. Some guy calling up his broker and asking to sell his Apple shares won't.
So retail orders and index funds are safe, so they can be charged lower spreads. And because they're profitable, market makers compete for the volume, driving down prices. And the data supports this - prices paid by retail investors has crashed, and complaints from hedge funds and big active investors has spiked. :)
There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.
But, to the extent that you believe the argument that HFT is essentially front-running, then HFT gets the tight spreads and better pricing.
Market makers aren't agents of traders.
Sure. That's why I wrote "essentially" front-running. Perhaps I should have written "effectively" to better clarify?
In any case, I am referring less to the tort and more to the common complaint that people have about HFT: WRT how it disadvantages small investors.
>People believe all sorts of weird things
Indeed. But, I don't believe that to be an esoteric complaint. In fact, it seems to be one of the chief complaints where HFT is concerned.
That is true. But: it is not.
Lots of people also believe that high-end market research (for instance, targeted research and maybe even electronic surveillance about how many widgets a company has sold) is a form of insider trading. But: it is not, even though lots of people say that, and for the same reason.
In both cases, people believe there is something shady about people going to extraordinary lengths to obtain a trading advantage. And, in both cases, not only is the market resilient to those efforts to gain advantage, but the markets are theoretically improved by them. The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price for something, and to make it efficient for people to buy and sell at that price.
I am also aware of the arguments in favor of HFT. As you stated, the oft-made claim that the market is improved is theoretical as well; hence, is also a product of "belief".
It's not a settled question. [0]
>The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price
Yes.
[0] https://www.investopedia.com/ask/answers/09/high-frequency-t...
You can disagree that these are things worth optimizing (though if you weren't careful you'd risk arguing in some sense against the premise of a market), but it's less clear to me how you'd argue that the causality is other than what my argument says it is.
See the previous link I posted. Also, of course, "Flash Boys" by Michael Lewis. There is no shortage of discussion around this question.
Regarding Flash Boys: I don't know of a single person who works in trading who has stuck up for that book. I strongly recommend "Flash Boys: Not So Fast", which debunks it but is also much more interesting from a technical perspective than Lewis's book.
Never said that.
We seem to be having trouble communicating. It happens. Thanks for the discussion.
Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc. It's big institutionals with size to trade that get front run and have to worry about HFT killing their shortfall. On the institutional side, it's about lit venues preferring HFT w/ special orders types and thin top of book. On the retail side, the issue mostly comes down to direct feed vs. SIP/CQS thanks to NBBO that opened the door for latency arb courtesy of yet more regulation. Blame your regulators folks. This is why dark pools became a thing.
> and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy
This bit is certainly true.
Source: hedge fund trader who hates HFT not in principal but because they are good at what they do