How do HFTs add valuable liquidity to the market? Does the 500ns faster transaction time for a block of AMZN matter to literally anyone? Other than the two sides of the trade who lost some money to the HFT who MITM'd them.
When someone buys liquidity, they don't do so to close their order 500ns faster. They do it to ensure they can trade at the current market price because they don't want to take the risk that the market will move away from them while waiting for a counter-party to trade with.
Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.
So your contention is that HFTs make prices more stable? That they somehow assume risk and that justifies their profits. How would that work? I thought HFTers only got involved in between two parties when they knew they could make a profit. That's why HFTs don't have days when they lose money.
Faster transaction times result in tighter spreads, as HFT firms compete each other on the price-time priority queue. HFT firms compete against each other on time, and while yes, that's a zero sum game, the end-result to the broader market is useful.
An analogy might be something like Uber and Lyft competing with each other for clients and drivers. From the perspective of everyone else, it doesn't matter much if they ride Uber or they ride Lyft. But the adversarial games that they play against each other [Uber and Lyft] are beneficial to both riders and drivers. Perhaps a duopoly isn't the best example, so you may extrapolate this to any industry where there's a sufficient amount of participants to keep things competitive.
But the spread in many-to-most stocks is limited by the sub-penny rule (SEC rules, as of 2005, say you can't have a spread < $0.01) rather than by the supply of market makers in that stock. Extra competition in those markets is negative-sum.
The SEC rule is that one may not quote a spread less than 0.01, but that does not mean one can not trade with a spread less than 0.01. There are several workarounds available that are well known, the simplest is in the form of mid-point pegged orders that allow spreads down to half a penny. On top of that U.S. exchanges offer a variety of different fee combinations, including negative fees which can be used to decrease the fee even further. All HFT firms take advantage of these fees, furthermore there are liquidity enhancing programs offered by the major exchanges as well as by ETFs. These can all be used to reduce the spread of a stock below the 1 cent limit.
The main reason they compete on speed is because it's illegal to compete on price. Abolish the sub-penny rule and it'd go back to being boring market plumbing.
This isn't really a good take: many markets do not trade one tick wide in the first place and people are still competing on speed. Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat.
Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.
Trading has never been a vanilla/boring business and it likely never will be either.
> many markets do not trade one tick wide in the first place and people are still competing on speed
True but not something that I find compelling. If you can only compete on price in penny increments, then you'd have to be hugely more confident to undercut a 1c spread with a 2c spread; if you could offer a 1.8c spread by taking a little more time over your calculations, that would change things.
> Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat.
I mean yes, to the extent that there's profit in it at all. But the profits have already been shrinking year-on-year. Plenty of mature industries like supermarkets are utterly cut-throat, but don't bother regular people.
> Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.
Well, it's the same thing, like the project management triangle - you can always trade quality for speed and vice versa, the hard part is when you want to improve both. But I do agree that at this point a lot more of it is known quantities and techniques.
> Trading has never been a vanilla/boring business and it likely never will be either.
My sense is that it's no longer where the best and the brightest go (and as I said before, profits are shrinking a lot). More and more of it is commodified. Which is what we should expect from any industry, honestly - at some point things are new and exciting and profitable, then they become mature and less so.
