Yes, and putting everyone in jail serves the real economy by creating jobs building jails. And if we researched ways to torture people, the economy for grails and iron maidens will double maybe triple overnight!
...Just because HFT serves the economic interests of two narrow groups (traders and computer vendors) doesn't it mean it benefits the larger economy, nor does it justify it morally to the remainder of the population whose economic futures are tied up in it.
HFT doesn't move markets; it simply takes advantage of the lag between information becoming available and the market's response. By doing this, HFT makes the market respond to information faster.
This is how arbitrage works. If there is an inefficiency in the market (e.g. the speed with which the market reacts to information), someone can take advantage of it. By taking advantage of it, the inefficiency disappears. Eventually, the arbitrage becomes commoditized and the "value" of the arbitrage situation is a few points above the cost of the solution.
You can't apply morality to financial markets. All investments carry risk, and its up to each individual investor to choose securities in line with their personal risk tolerance. If the investor doesn't understand the risks involved in a security, they shouldn't be making investment decisions, full stop. If you're like the majority of US retail investors, you're buying a stock and holding it for a long time. HFT doesn't really affect you in that case, because they play both short and long positions alternated many times throughout the day, yet averaged over a period of time it's a zero sum game.
A good analogy to think of are Riemann sums vs. integrals in calculus. The actual movement of the market is the curve, but you don't know the formula of the curve and you need to measure the area under it. So you approximate the curve by sampling a number of points (the current price of the stock at any given moment) and calculating the distance from the axis. HFT effectively allows you to sample more points, getting a more accurate result by removing "arbitrage" (or space between the sampled points and the actual curve).
Actually it's a fact that they're doing that since they're playing the spread and by definition that means offering liquidity. The debatable point of course is whether it counts since they might yank all liquidity in response to unexpected movements and thus weren't offering usable liquidity.
Liquidity is that which isn't there when you need it by definition. Unexpected movement always reduces liquidity. The only interesting question is is the spread tighter when I want to trade in the presence of HFT or in its absence. Then you look at all the times that non-liquidity providers may want to buy and sell and determine that.
As far as I know it's almost always a tighter spread in the presence of HFT. So when you buy you buy cheaper and when you sell you sell for more money. The profit from market making shifts from know nothing sons of friends of the brokerage's CEO to those who can compete at something real. Everyone except those whose Daddies can get them high paying jobs wins. Financial market function more efficiently making it easer for smart people to get funding to do promising ventures. Incumbents, eh, annoying when the gravy train loses steam, really annoying.
While I agree with some of your points, I don't see how they relate to the conversation you stepped into.
> The only interesting question is is the spread tighter when I want to trade in the presence of HFT or in its absence.
There's never only one interesting question, so that's not correct. If you're seeing liquidity that disappears the second you try and touch it, it's an arguable point that's it's not real liquidity.
If you genuinely can't hit a price being shown, ever; I'd call that market a fraud. A spread you literally can't ever trade is not a spread it's a lie. I've never seen any evidence of it. And it should be really easy to spot. Spread width n millis before execution. Spread at execution. IF the latter is consistently wider it's not a market it's a con, take your business elsewhere. Of course with two players vying to be at the front of the queue showing the tightest possible price, well spying on your ioc order and backing off just means you make no money. Competition is good like that. Only one market maker in a market? Yeah that's always been a problem and likely a worse one when it's some rich, fat bastard who knows it, knows you and can rip your face off. And they do. Michael Lewis made a career out of documenting it. In the Big Short, in Liars Poker etc. etc. But it doesn't seem to happen when there's HFT does it because if you quote a market like that you make no trades and someone else gets the pennies on offer.
The actual spread that you can actually trade when you want to trade is the only thing that is interesting when discussing liquidity. No really. If that spread that you actually can trade is wider it's more expensive, if it's tighter it's less expensive to transact in the market. The rest is a load of BS. And smelly BS. That spread that you can actually trade has been shown to be consistently tighter in the presence of HFT. Evidence showing otherwise is something, we all will be very interested in.
> If you genuinely can't hit a price being shown, ever; I'd call that market a fraud.
Which is exactly what many are complaining about; welcome to the conversation.
> Spread width n millis before execution. Spread at execution. IF the latter is consistently wider it's not a market it's a con, take your business elsewhere.
Again, that's the complaint they have, see, you do understand the debate.
I'm not the one making the claim nor am I against HFT, I'm simply highlighting the fact that there are those making the claim and they do have valid arguments and they do claim to have evidence so go see their evidence.
Yeah see this is just plain silly and emphatically does not show vanishing quoted volume when you hit an order. It shows prices being adjusted when things happen on other markets.
The test is can I put a single order in to hit a price being shown on onesinglemarket and consistently miss when nothing else is going on. Because that really is fraud. This just plain isn't. This is taking info from another market and updating your price as fast as possible so you don't get arb'd as a market maker.
Why is the test one single market? Because if you're transacting a very large, (ie market moving) qty for something on multiple markets you'd expect that information to move the other markets where that instrument is being quoted. So now it's just that market makers are set up to deal with info from the other markets really fast. Maybe their link from one exchange to the next is faster than your link to the second exchange. That's clearly what is happening here. This is incredibly competitive nature of quoting really, really tight. You can't do it otherwise, you have to be wider. This is also falls under the normal definitions of efficient market hypothesis.
Note these guys who are complaining still get better prices for their market moving qty than they would get in the absence of HFT. That is with no HFT they could successfully transact all their volume at a much worse quoted price on all those markets and their investors are worse off. Effectively the worst price they get as the market moves with their big trade as they execute at multiple prices would be the best price anyone would ever show in the absence of HFT.
But hey if you're sucking as a funds manager while charging a fee that is a wealth tax in excess of 1% per annum of total wealth you've got to blame something, right? Short sellers are a popular one too despite being the basically only counter-mechanism we have for bubble inflated asset prices. And if you're a broker, some nerds cut your lunch, make them stop with their superior skills, dammit.
The width of the spread you actually get is the only thing that matters, but there is a mountain of BS fearmongering to divert your attention. That's where this convo started.
I think we've all fully expressed ourselves now. All the best.
...Just because HFT serves the economic interests of two narrow groups (traders and computer vendors) doesn't it mean it benefits the larger economy, nor does it justify it morally to the remainder of the population whose economic futures are tied up in it.