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.
Comments
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.