> Let's say all subsecond trading is abolished tomorrow, and rather than a s...

artsrc · on July 30, 2010

The typical trading range for the day is $100 to $110.

Scenario 1:

So someone offers (is willing to sell) a limit order at $100. Buyer bids at $110. They wait until the other order appears and cross according to some market rules (perhaps at $100, $105 or $110), no-one else gets anything.

Scenario 2:

HFC works out the trading is in range $100 to $110, puts bids in at $104, offers at $106, and makes $2. The sellers gets $104, the buyer pays $106 and both are better off than scenario 1?

jbooth · on July 30, 2010

Even at subsecond intervals?

(I'll note that the bid/ask spread becomes effectively zero every time an actual trade happens -- what if it actually reflected market prices rather than a bunch of video games competing against each other?).

Does it hurt the buyer and seller more than the little nibbles these guys are taking to smooth out that curve?

I see a lot of paychecks being cut in this industry and I don't see the value being created. Looks like highway robbery to me.

anamax · on July 30, 2010

> Does it hurt the buyer and seller more than the little nibbles these guys are taking to smooth out that curve?

Why are you assuming that the buyer and seller are hurt?

> I see a lot of paychecks being cut in this industry and I don't see the value being created. Looks like highway robbery to me.

I don't see the value in smurfs, but don't think that they're "highway robbery".

Liquidity, on the other hand, has huge value. Disagree? Try to sell an illiquid asset.

chopsueyar · on July 30, 2010

So a decrease in liquidity will cause an increase in volatility?

gsmaverick · on July 30, 2010

Possibly, but the biggest difference would be the increase in the bid/ask spread.

jbooth · on July 30, 2010

I don't see why high-frequency trading contracts that spread.

If they overlap very briefly (say, across different markets) and nobody else has noticed yet, a trading program jumps in and arbs the difference. That increases the spread.

yummyfajitas · on July 30, 2010

If they overlap very briefly (say, across different markets) and nobody else has noticed yet, a trading program jumps in and arbs the difference.

Utter nonsense. In the case of crossed markets it is illegal to trade. Trading under these circumstances would violate RegNMS and most matching engines will reject orders that would cross the markets.

HFT firms reduce the spread due to competition. If the spread is $0.03 (say $9.97 and $10.00), I can do one of two things to be at the top of the order book and be the first to trade. I can either place my order first, or I can place an order at a higher price. If I'm the fastest, I have the earliest order at price $9.97 and I get filled first in the event of a trade. In this case, I make $0.03/share. If I'm not the fastest, I can still get to the top of the book by placing an order at $9.98. This reduces the spread to $0.02, and I can only make $0.02/share.