In any case it is not expensive to start a firm like this relative to most things in finance or even other physical market-making businesses like running a retail store. You could do it with a few million dollars and a dozen technologists/researchers. That's why this debate is so stupid. Banks who are mostly the ones complaining about having trouble executing could easily hire up a team to build better routers and execution algos for them. Most of them have, even, which has cut HFT profitability considerably. The laggards prefer to go on CNBC rather than invest in technology to keep up.
I have no issue with the market in general or people making money providing investment to others who need it.
Where I am having problems is when the market becomes it's own closed loop and the money is made inside of that loop. I been on the sideline of this industry for many years now and I have yet to see any company who is successful in the long run be so because they play a fair game.
Reading stuff like this:
http://moneymorning.com/2012/10/15/the-truth-about-high-freq...
certainly doesn't help.
"...What they are doing is trying to influence, I call it manipulate, what other traders and investors do with their bids and offers. They are trying to fake or set-up other market participants to react to the quotes the HFT players fire out onto the exchanges for all the stocks they trade.
Only the HFT quotes sent out aren't meant to be acted on. They aren't looking to buy on their bid quotes or sell on their offer quotes.
Instead, they are sending out orders to "ping" markets.
Ping refers to how sonar works. For example, a submarine sends out a sonar beep which hits a target and sends back a sound (which sounds like a ping) which the sonar operator "reads" to determine the pinged object's distance and shape.
HFT players are constantly pinging stocks where their quotes are housed and displayed. They send out their orders to manipulate others to adjust their quotes, which get fed into the HFT algorithms to determine any directionality; then, if an opportunity exists the HFT computers buy or sell shares that someone else has put onto the market.
They aren't quoting constantly as bona fide "market-makers" are supposed to do, which they claim they are acting like. They are simply putting out millions of fake bids and offers which they pull almost immediately, just to read the movement of other market participants who react to the HFT come-ons.
It isn't illegal. But it is manipulation.
The buyers and sellers the HFT crowd trades with aren't forced to trade, they are willing to trade -- it's just that the prices they trade at may have been manipulated..."
Can you explain to me how HFT benefits society in general? What would happen if we didn't have HFT? Would the market crash? Would there suddenly be no money to invest with?
The activity he describes is illegal. Every order you place must be because of a bona fide interest to trade at that time, and not as an attempt to induce others to act or gather information.
If I could get filled on every bid and offer I have in the market I'd be very happy. That's basically what happened to the MMs on the other side of the Knight debacle.
HFT moves liquidity across time, place, and product. It drives down spreads by intermediating trades for a lower cost than human market makers had to charge. The market would not crash if HFT went away, but markets would become less efficient, more trades would go off away from fair values since nobody could correct small-scale mispricings, spreads to customers who immediately want to buy and sell would increase, and short-term volatility would go up since nobody would buffer transient pricing errors. It'd be like if all the grocery stores around you folded and you had to trek up to the meat market and buy things in bulk. It would be very inconvenient and expensive, but not the end of the world.
Comparing it to a McDonalds franchise make little sense IMO both in terms of what the investment is used for and the returns you stand to gain.
With regards to the inconvenience and price of not having HFT around. That again sounds like an issue for the traders not for the companies the stockmarket is supposed to help.
The stock market is designed for traders! The primary purpose of a stock market is to let stockholders transfer risk most efficiently. The capital raising was done when the company issued shares. People buying stocks are not investing.
You claimed that it would be much more expensive if HFT wasn't around. So surely HFT should be able to reap the benefits of what they save no?
Imagine the grocery store example I gave. Say meat costs $5/lb wholesale and your transportation costs to drive to the meat market in a car are $1.50. A grocery store using a truck to pick up the meat and freeze it in their store can transport the meat for $0.50. In a non-competitive market, they would charge you $6.49 for the meat, and you'd prefer to buy it there since it's less than your alternative of paying $6.50. However, if there are two grocery stores across from one another, they can compete on price to win your business, and the price of meat will end up being marginally above the costs of whoever can transport/store meat the cheapest, maybe $5.55 or something. The end consumer captures most of the surplus value.
The same thing happens in trading. Professional traders are more skilled at managing positions and trading across markets. By electing to trade with a market-maker's quote, you are effectively giving them your trading problem. Unlike the grocery store example where only a handful of businesses may compete, there are dozens of firms engaged in automated trading all competing for your business by offering tighter prices. They'll continue to do this as long as it's profitable, but competition will erode their profit margins until they're slightly above costs.
HFTs made a killing when they had first-mover advantage, just like if you were the first company to use smart logistics software or any other innovation. Now, not so much.
Say you have a car and want to sell it to buy your future wife an engagement ring. You could take it to CarMax and sell it instantly, or spend your time researching a fair price, posting up ads, cleaning it up for sale, meeting with potential buyers, etc. CarMax has all sorts of "unfair" advantages: they've developed superior pricing models, they have access to historical auction data you may not be able to get, they can sell their inventory in the inter-dealer auction market, they've invested heavily in their own sales force to resell the car, through economies of scale they can hire their own detailers and mechanics to fix the cars up at a lower price, etc. CarMax is clearly superior to you at the "reselling used cars" game, though all the advantages they have are things any competitor could choose to purchase. They make money doing this, but people still choose to deal with them because it's a net benefit to be able to sell your car instantly.
Some people prefer to sell their car to CarMax, others try their hand at doing it themselves, and through their patience they may save a bit of money. Likewise you can do the same in the financial markets. You can work your own limit orders to enter or exit positions or trade in the opening/closing call auctions on each exchange, but many traders prefer to trade instantly with quotes placed by a market maker. Being able to liquidate your stock holdings to spend the money on something else instantly is valuable to some people, and they pay for it through the bid-ask spread.
You're basically saying people want the wrong things.
If its only beneficial as a scheme to get money out of the stockmarket then many people are naturally going to be against it.
Claiming i am on the wrong side of what people want seem to be a tad ignorant of reality, dont you think
http://marginalrevolution.com/marginalrevolution/2014/04/a-s...
For me to win trades as a market-maker, I have to put up prices that are tighter (buying higher and selling lower) than my competitors. Through this competitive process, the rents earned by market-makers decrease and the end consumer of their liquidity reaps most of the benefit. Since markets have moved away from a monopoly specialist model and become more electronic, spreads (and thus compensation earned by market-makers) have decreased dramatically.
Nobody is backing it up because a.) firms involved tend to be secretive so as not to give away any competitive information, b.) there are a lot of slow or inefficient brokers speaking out against it "talking their book", and c.) to the end-user, HFT is like plumbing. I don't thank the city workers every time I hop in the shower, or write a glowing blog post about Visa when I swipe my card to buy goods and services all over the globe. The infrastructure exists and it provides a benefit, but it's faceless and not something most people think about. Most people don't even consider who is on the other side of their trades or where the prices even come from. They just want to click a button and get in or out of a position, and thanks to competing HFTs they can do it instantly, cheaper than ever before.
Unless you are saying that programmers are a majority, and their savings are typical of the same majority?
EDIT: (And reading the other response, it seems you are in fact incorrect).