Oh my. If you don't understand the qualitative difference between trading a stock (selling it hours, seconds, or even milliseconds after you buy it) and long-term buy-and-hold investment, this is going to be hard; but I will try.
And the second sentence above is floundering pedantry. If I meant investment, I would have written "investment." Isn't it best to give fellow TFTers the benefit of the doubt? Or does it amuse to misconstrue others' remarks into the worst possible light?
...says the guy who just equivocated between "investment" and "long-term buy-and-hold investment" in order to paint my remarks in the worst light. A traditional brokerage that buys a supply of a stock in order to make a market in it for filling the day's anticipated orders is investing in that company too, even if it sells it hours after it buys it. The difference between trading and investing is much like the difference between kilowatts and kilowatt-hours -- it's the same phenomenon, but looked at either instantaneously or integrated over time.
But that said, yes, of course HFT benefits society. Do you know what a "bid-ask spread" is?
I've already pointed out the benefits of "specialist" traders. Did you even read my post?
Yes. What, are you claiming that "specialist" traders help reduce bid-ask spreads but HFTs don't? What evidence do you have for that?
And I asked rhetorically why brokers offer zero-commission services. Did you think about that?
Um, in order to attract customers away from other brokers? This is not rocket science. (Not that the traditional brokers are charging high commissions any more. Ain't competition wonderful?) If you mean, where are they making their money, presumably they're getting a cut of the bid-ask spread.
If you honestly believe HF traders "discover" a price a millisecond earlier, you'll have to explain how that helps me. It takes me much more than a millisecond to click on the boxes when I'm making a trade.
Sure thing: the same way it helps you when a HF trader offers his secretary a dental package. It's simply one more arena of competition. Discovering a price a millisecond earlier lets a broker identify arbitrage opportunities between (say) New York and Chicago a few milliseconds before his competitor. If the broker can make money on a risk-free arbitrage he can afford to cut commissions; and he'll do it to keep you from taking your business to his competitor. Competition between sellers of the same service is good for customers.
Is the incremental amount of bid-ask-spread reduction from those few milliseconds large enough to justify paying $300 million for it? I don't know. Frankly, I doubt it.
Let's stop right here. Do you think the firm that spent $300 million spent it stupidly? Answer Yes or No, so we can move on. Spoiler:
They wouldn't have spent it if they didn't already know they could recover the money and more. Duh.
Strike "know". They
thought they could recover the money and more. That sort of expenditure is a gamble. There are plenty of cases of HFTs making losing bets. But that's not even the issue. What I said I doubted was whether the benefit
to the public was worth $300 million. (The public is who benefits from bid-ask spread reduction.) It could have been smart
for the firm even if the public benefit was negligible -- that would just mean their competitors made $300 million less. I'm okay with that -- I don't expect Coke to trouble itself about its strategies hurting Pepsi's profit margin either.
Whether they spent it wisely or not, the fact that they did should be meaningful. Where do you think the $300 million in revenue needed to recover this cost was supposed to come from? Make a serious answer, please, to prove you're serious.
Presumably, from the price differences between New York and Chicago that the traders are trying to inform themselves about a few milliseconds faster. This is how bid-ask spreads get shrunk: a would-be buyer in Chicago now gets a lower asking price than he would have back in the 20th century because now New York sellers are competing with Chicago sellers to sell him their shares.
Wrong again. The "leapfrogging" is not a man-in-the-middle attack (although it almost sounds that way). The cable transmits information already available to brokers in Chicago, but sending it to New York faster than the other guys did.
In which case, why do you describe it as "stealing" when an HF-Trader sees an order to buy Acme Widgets for $90 in Chicago and sees somebody selling it in New York for $89.99 so he buys from one and sells to the other? Who's he supposed to be stealing from? The Chicago buyer and the New York seller? Why? Because they could otherwise have dealt with each other directly and saved a penny? They could have done that even with the HFT in the picture -- nobody forced them to deal with him. They could wait out the milliseconds, discover each other when the other guys send the news to New York, and cut out the middleman. If they choose to take the first available offer instead of waiting to see what other offers might roll in, that's their choice -- presumably the certainty of having the trade completed as soon as possible is worth a penny to them. That's not stealing; that's payment for service rendered.
I am NOT complaining about the cost of the cable. That's just symbolic of how valuable such fast data was. And, since trading is a constant-sum "game", for an HFT firm to get a Million $ profit — or a Billion $ — someone else would have to lose that money.
What makes you think trading is a constant-sum game? People normally trade because both parties benefit. If I buy a hundred shares of XYZ Corp. for $1000 it's because the stock is worth more than $1000 to me. If the guy I buy it from sells it its because the stock is worth less than $1000 to him. That's not constant-sum; that's getting stock into the hands of the person the stock's worth most to while getting money into the hands of the person money's worth most to. That's positive-sum.
Why is the same stock worth more than $1000 to me and less than $1000 to him? There could be any number of reasons; typically it's because of different personal situations, different discount rates, different levels of risk aversion, and different diversifications in our respective portfolios.
Now that might be a serious issue. A lot of things that aren't harmful in isolation can start to do damage when they grow to become a significant fraction of market volume; buying on margin and short-selling are in that category too.
Are you backing away from your previous misconception? Or did you agree with me all along?
The hell are you talking about? What previous misconception? To quote myself from the previous thread, "Nobody here is arguing short selling should be unregulated."
But Canada put a tax on HFT a few years ago and their bid-ask spreads rose 9%. That's not doing a favor either to regular investors or to the economy.
The
spread rose 9%, not the price. In other words, I might pay $90.17 for a share that otherwise might have cost $90.16. I could live with that. ...
Um, [quickly works the numbers] you're saying the bid-ask spread on a $90.05 stock was
11 cents?!? Yippee!!! Let us all thank our lucky stars that HFT was invented, for making the market so liquid it has brought adequately diversified stock portfolios within easy reach of the common man.