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.
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.)
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.
It's kind of weird that people have such strong opinions about things they know very little about.
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?
https://www.zerohedge.com/news/2017-04-09/horseman-global-un...
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).
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?
Strategies that had less efficacy at $100mm position sizes now can scale to $10bn position sizes.
I like the growth of liquidity.
This is categorically not what HFT firms are doing.
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.
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.
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.
Therefore, Markets don't need HFT firms to provide this service, they simply coopted a friendly-sounding rationale in an attempt to dismiss skeptics.
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.