They are only competing with other delivery companies.
I don't think this is true. They are trading on the same market as everybody else. People used to make money buying in market A and selling in market B. Now HFT has mostly taken over that role, for instance.
Anyway, finance has created a shitload of abstraction, and at this point it isn't clear if "normal" people benefit from this or that it's just the incumbents.
To make another analogy, yes, feudal lords provided some benefits to the peasants, such as safety and shelter. But you really have to step away from the entire construct to see if they are really better off. This is what is missing in your argumentation, imho.
People used to make money buying in market A and selling in market B. Now HFT has mostly taken over that role, for instance
Who is "People"?
Well now, I cannot claim to know what everyone did at any point in time, but allow me to be very doubtful that anyone other than a dedicated arbitrager/market maker would do that.
Or at least, I cannot conceivably see how one would do that and turn a profit without being also a market maker.
The economics of arbitraging are just too tight.
You need to spot and act on a cross exchange spread that is wider that:
- The exchange fees, for which market makers have rebates. So even at equal technological footing, MM will have an advantage over "People".
- The cost of funding, for which you will need to post IM, and thus already be a professional investor with a good amount of capital.
- If that was "before HFTs", then it was before odd lots as well. Now I don't know what the average price of a US share is, but let's say a couple hundreds of dollars, times 100 lot size. These "People" better be filthy rich in cash.
- Arbitraging at a couple of price levels (which is already a lot), minus costs, would yield you a couple bips per trade. To make any kind of real money doing that, you better do it a trillion times per day, and thus lock a huge amount of money.
- The market risk over the arbitraging period
I don't think I have seen anyone turn a profit arbitraging naively in the last 15 years that were not some kind of market maker already, or some ad-hoc strategy on very ad-hoc EM markets.
I don't think this is true. They are trading on the same market as everybody else. People used to make money buying in market A and selling in market B. Now HFT has mostly taken over that role, for instance.
They aren't though that's kind of the thing. HFT Market Makers (i.e. the big HFT firms) aren't just trading in the same market. They are the market. They coordinate the trades and effectively instantly sink every buy and sell into themselves and handle the matching of those spreads.
The market makers are competing against each other to offer access to the market to you.
Comments
I don't think this is true. They are trading on the same market as everybody else. People used to make money buying in market A and selling in market B. Now HFT has mostly taken over that role, for instance.
Anyway, finance has created a shitload of abstraction, and at this point it isn't clear if "normal" people benefit from this or that it's just the incumbents.
To make another analogy, yes, feudal lords provided some benefits to the peasants, such as safety and shelter. But you really have to step away from the entire construct to see if they are really better off. This is what is missing in your argumentation, imho.
Who is "People"?
Well now, I cannot claim to know what everyone did at any point in time, but allow me to be very doubtful that anyone other than a dedicated arbitrager/market maker would do that.
Or at least, I cannot conceivably see how one would do that and turn a profit without being also a market maker.
The economics of arbitraging are just too tight.
You need to spot and act on a cross exchange spread that is wider that:
- The exchange fees, for which market makers have rebates. So even at equal technological footing, MM will have an advantage over "People".
- The cost of funding, for which you will need to post IM, and thus already be a professional investor with a good amount of capital.
- If that was "before HFTs", then it was before odd lots as well. Now I don't know what the average price of a US share is, but let's say a couple hundreds of dollars, times 100 lot size. These "People" better be filthy rich in cash.
- Arbitraging at a couple of price levels (which is already a lot), minus costs, would yield you a couple bips per trade. To make any kind of real money doing that, you better do it a trillion times per day, and thus lock a huge amount of money.
- The market risk over the arbitraging period
I don't think I have seen anyone turn a profit arbitraging naively in the last 15 years that were not some kind of market maker already, or some ad-hoc strategy on very ad-hoc EM markets.
They aren't though that's kind of the thing. HFT Market Makers (i.e. the big HFT firms) aren't just trading in the same market. They are the market. They coordinate the trades and effectively instantly sink every buy and sell into themselves and handle the matching of those spreads.
The market makers are competing against each other to offer access to the market to you.