Having liquidity available to take is not useless. You should re-read the article - it is a zero sum game between liquidity sellers, and a positive sum game between liquidity sellers and liquidity consumers.
At the end of the day they're levying a tax on the rest of the market...
It's not a tax. If you choose not to take liquidity you don't pay for it. If you do choose to take liquidity you pay less than you would under other systems (e.g., specialists).
There is a simple obvious way for anyone to avoid paying the HFT "tax". Use ALO orders. They come with execution risk, but you don't pay the spread and the matching engine will pay you rebates. Can you tell me why anyone anywhere would choose to purchase from HFTs rather than using ALO orders?
Um, I covered that point pretty thoroughly.
>It's not a tax. If you choose not to take liquidity you don't pay for it.
It isn't a choice. You cannot chose to not participate in an equities market without HFT. Not right now, anyway.
>If you do choose to take liquidity
You you even understand yourself what that phrase means?
And why would I not be paying this to a human market maker, in the event that HFTs hadn't driven them all out of the market?
There's nothing sinister about HFT except that it's a faster version of ordinary market making. If you think market making is evil, then you'll think HFT is evil. But market making is perfectly healthy, economically speaking. Information advantages and speed have been part of this world in the 400-odd years that centralized trading has been a thing.
HFT is a threat to other market makers, but you're smart enough to know that common people shouldn't be market making and can (provably) only benefit from reduced spreads and increased liquidity. Right?
They even have an example in the linked article of a trader being forced to pay higher prices for his buy orders due to HFTs front-running his orders; you literally couldn't be bothered to even read the linked story.
Please explain the mechanics of this.
...a trader being forced to pay higher prices for his buy orders due to HFTs front-running...
Clearly you didn't understand the article, which was about predatory trading increasing market efficiency. It was not about front running, which is when your broker trades in front of you in violation of his fiduciary duty to act in your best interest. (Note that your competitors do NOT have the duty to act in your best interest.)
When the exchanges are complicit in the deal - being paid for sending information early to particular parties - it's pretty easy to argue there is a conspiracy to defraud the general public, and so regulators have regularly argued:
http://www.gotgoldreport.com/2014/03/why-new-york-ag-wants-c...
I assume that when these practices are finally banned you will change your tune, right?
I truly don't understand what you are arguing. Could you please explain the mechanics of what you believe should be illegal?
You say that a lot.
I already explained the exact mechanics in this comment: https://news.ycombinator.com/item?id=7500223
...which you did not respond to.
"Use pattern recognition software to outcompete other traders" is not a trading mechanic.
Front running refers to a broker placing his orders (i.e. the BROKER'S orders) in front of his customer's orders. This is a violation of fiduciary duty, SEC regulations, FINRA regulations. When the broker gets a customer order, it must be given priority over the broker's proprietary trading. This has been in place for decades, well before trading was electronic.
If an HFT (or any other trader, regardless of speed) places an order into the limit order book of an exchange or other trading venue AHEAD of another customer of that exchange, that is not front-running. That is the normal and correct functioning of the markets, which operate by price-time priority.
tl;dr - trading faster or more frequently than other market participants (who are not your brokerage customers) is not front running.
>Although the latency competition provides little to no value to the end >consumers, all HFTs must play the game. If they don’t, a faster HFT >will beat them to market and their order flow will be reduced.
So yes, it's essentially useless to the retail or wholesale investor.
Actually, worse than useless, since the HFT has a built in advantage that brings no value to the rest of the market. It's an endless zero sum game where other investors (who do the real work) are losing.
>I’d also like to note that I don’t believe automated market making is useless. It isn’t. Providing liquidity and reducing the spread is valuable.
Which HFT is actually pretty poor at. Spreads were reduced significantly by having electronic trading systems (computers are cheaper than manual labor), NOT through high frequency trading systems (did spreads drop significantly in the last 5 years?).
Liquidity was already maxxed out in the equities market before HFT, too. HOUSES are illiquid -- it takes weeks to close on a sale on one of those at best. THAT market could do with additional liquidity. Would be nice to close on a sale in a day, right?
Being able to buy and sell your share a thousand times in a second is not providing useful liquidity to anybody except HFT traders.
At the end of the day they're levying a tax on the rest of the market - i.e. as the OP points out, the market IS rigged.
>In the Hacker News comments on part 1 of this series, there were several comments suggesting that HFT’s somehow steal pennies from ordinary investors. I don’t agree with this claim, but I’m very interested in hearing well reasoned disagreement.
I'd be interested in hearing this well reasoned disagreement with the OP. I'm not so interested in reading the same old tired defenses of HFT, though.
It's not about liquidity or transaction costs. It's about gaining an information advantage similar to what front running or insider trading gets you.