Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.
You thought wrong. While there are a variety of things that HFT firms do, most of it is market making.
Well, I guess semi-regulated.
https://medium.com/automation-generation/15-well-known-high-...
They're also regulated in various ways.
An analogy might be something like Uber and Lyft competing with each other for clients and drivers. From the perspective of everyone else, it doesn't matter much if they ride Uber or they ride Lyft. But the adversarial games that they play against each other [Uber and Lyft] are beneficial to both riders and drivers. Perhaps a duopoly isn't the best example, so you may extrapolate this to any industry where there's a sufficient amount of participants to keep things competitive.
Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.
Trading has never been a vanilla/boring business and it likely never will be either.
True but not something that I find compelling. If you can only compete on price in penny increments, then you'd have to be hugely more confident to undercut a 1c spread with a 2c spread; if you could offer a 1.8c spread by taking a little more time over your calculations, that would change things.
> Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat.
I mean yes, to the extent that there's profit in it at all. But the profits have already been shrinking year-on-year. Plenty of mature industries like supermarkets are utterly cut-throat, but don't bother regular people.
> Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.
Well, it's the same thing, like the project management triangle - you can always trade quality for speed and vice versa, the hard part is when you want to improve both. But I do agree that at this point a lot more of it is known quantities and techniques.
> Trading has never been a vanilla/boring business and it likely never will be either.
My sense is that it's no longer where the best and the brightest go (and as I said before, profits are shrinking a lot). More and more of it is commodified. Which is what we should expect from any industry, honestly - at some point things are new and exciting and profitable, then they become mature and less so.
Add to that the fact HFT are profitable and they must therefore provide negative economic value. Either the seller or the buyer is failing to capture value.
Your understanding of HFT is wrong as well. It's not all low latency arbitrage. It's also execution finesse, risk management and ML-heavy. HFT firms will still be extremely active under this new market structure.
“Very short time-frames for establishing and liquidating positions.” strait from the SEC: https://www.sec.gov/marketstructure/research/hft_lit_review_...
Now it’s true an individual stock may only see 5 trades per day from a HFT algo, but theirs more than just one stock. The larger pool of money sitting around waiting for those 5 trades the lower your ROI. So, the obvious strategy is to reuse the same pool of money to back multiple different strategies.
Anyway my point is that it's wrong to think that HFT are going out of business with this change because it's a fundamental misunderstanding of HFT. There's almost always an ML component and always an execution component and these two skills are going to be critical to profiting off the new market structure. Citadel, Jump, Tower, you name it. I promise you they will be all over this new structure.
I completely agree, and they are going to use the same tools. The question is if this change is a net positive trade for the economy, and that I don’t know but I have heard reasonable arguments in favor.
The slower a market maker is, the more risk they take on when they quote, because they are more likely to be caught by market moves - less likely to cancel their quote when the market starts moving, less likely to be able to hedge if they get filled at the start of a move. To make up for that risk, they have to earn more per trade. The only way to do that is to quote a wider spread [1]. That means that real money participants end up paying more when they cross that spread.
The value captured by HFTs has not come from real money participants, but from other, slower, market makers, and they have shared that value with real money participants.
[1] Or to demand a bigger stipend, or steeper maker-taker pricing, from the exchange, either of which means bigger fees for other participants.
All systems have waste, some more and some less. This is unavoidable. So the discussion might be more productive if it was framed like this: Which system provides more benefits with less waste? Would frequent batch auctions lead to less resources being spent on wasteful racing, and more resources performing useful services for other market particpants?
Or if we zoom out even more, the two main purposes of the market is allocating capital efficiently to businesses, and redistributing money from the working population to retired people (401k, IRA). And we can ask which market structure will make it better at these tasks?
Framed like this it becomes natural to look at the other side of equation. Instead of asking which structure would screw over HFT's the most, we can ask which structure would be most convinient for say index funds or other mutural funds. And which structure would be most convinient for the individual stock picker. We could even start to ask which structure would help HFT's provide more liquidity with less risk.