I disagree. Most HFT is market making (passive trading with limit orders only), and they make most of their money from short-term and impatient traders, who account for most of the volume and repeatedly pay the spread. Long-term traders, by definition, don't trade very often so they're a small fraction of the total volume.
And its the market makers who provide the liquidity (with limit orders) for the long-term traders when they do decide to trade, not the short-term traders (who take liquidity with market orders).
HFT market making is about being more informed about the true price at the micro structure level than your counter-party. Simple as that, no black magic.
If someone trades with a HFT market maker its because
a) they are un-informed about the current true price
b) they choose to optimize execution time over best price
Its the same market game that`s been played for decades, just with different players and tools.
I can't comment otherwise but I'd note that HFT is producing the illusion of market making without real market making.
By definition, HFT jump into liquid market and count on exiting illiquid markets faster than anyone else. That means that they don't actually bring a greater assurance that a trade will happen, in contrast to the traditional "market makers" of NYSE. The "flash crash" can be seen as a simple illustration of this but so could be the greater volatility we have seen in the last few years.
There are thousands of flash crashes a year in single stocks on the market, usually explained by algorithmic trading or mistakes but could also just be blind panic as the rational market adjusts to news, rumour and FUD. Usually these stocks are suspended and any problem trades reset.
Whether these are exacerbated by hft is hard to tell, but I can't see how it would help damp volatility. Probably they have more to do with momentum investors and algorithmic trading, though they can easily happen with only human trade too, just at a slower pace. Would be interesting to see stats on volatility going back decades, but it's probably quite a complex subject for a layperson.
I agree the liquidity seems to be an illusion. I imagine most HFT AI's have boundary conditions to stop trading once significant price changes occur to avoid losing money in unpredictable scenarios.
Comments
I disagree. Most HFT is market making (passive trading with limit orders only), and they make most of their money from short-term and impatient traders, who account for most of the volume and repeatedly pay the spread. Long-term traders, by definition, don't trade very often so they're a small fraction of the total volume.
And its the market makers who provide the liquidity (with limit orders) for the long-term traders when they do decide to trade, not the short-term traders (who take liquidity with market orders).
HFT market making is about being more informed about the true price at the micro structure level than your counter-party. Simple as that, no black magic.
If someone trades with a HFT market maker its because
a) they are un-informed about the current true price
b) they choose to optimize execution time over best price
Its the same market game that`s been played for decades, just with different players and tools.
I can't comment otherwise but I'd note that HFT is producing the illusion of market making without real market making.
By definition, HFT jump into liquid market and count on exiting illiquid markets faster than anyone else. That means that they don't actually bring a greater assurance that a trade will happen, in contrast to the traditional "market makers" of NYSE. The "flash crash" can be seen as a simple illustration of this but so could be the greater volatility we have seen in the last few years.
> The "flash crash" can be seen as a simple illustration of this but so could be the greater volatility we have seen in the last few years.
Which "flash crash"? The one about a year ago or the one in the mid-60s?
There are thousands of flash crashes a year in single stocks on the market, usually explained by algorithmic trading or mistakes but could also just be blind panic as the rational market adjusts to news, rumour and FUD. Usually these stocks are suspended and any problem trades reset.
Whether these are exacerbated by hft is hard to tell, but I can't see how it would help damp volatility. Probably they have more to do with momentum investors and algorithmic trading, though they can easily happen with only human trade too, just at a slower pace. Would be interesting to see stats on volatility going back decades, but it's probably quite a complex subject for a layperson.
Here are some examples: http://www.usatoday.com/money/markets/2011-05-16-mini-flash-...
I agree the liquidity seems to be an illusion. I imagine most HFT AI's have boundary conditions to stop trading once significant price changes occur to avoid losing money in unpredictable scenarios.