writser

I will probably not convince you but let me try. HFT firms mostly earn money that would have been earned by other market makers, like the "good old floor trader" and the "nice broker on the telephone". HFT firms can afford to give sharper prices because their systems make faster and better decisions. It's like a race to pick up nickels in front of a steamroller. Twenty years ago, floor traders would only pick up nickels a meter in front of a steamroller. Nowadays, HFT firms can pick up a nickel 5cm in front of the steamroller. It doesn't make any difference for the guy throwing away his nickels. But people are angry about this because A) they are scared of a robot racing around collecting nickels and B) they do not realize that they were fucked even harder by their friendly broker 20 years ago. The guy sounded so human on the telephone! ;) Regarding front running: A) No electronic exchange allows front running because this would kill their business instantly. It's a myth. B) Where do you think front running would occur more often? In an anonymous, completely automated electronic order book or in the "good old pit" where you can wink to your favorite trader if you have a big client on the phone?

Shit, I wrote a large first post but my internet connection went down. I'll write a small recap. Market makers (including High Frequency Traders) provide liquidity. And they take risks. They get paid for that, in the form of earning the bid/ask spread. Market takers require liquidity. They pay the bid/ask spread. For them, a tighter bid/ask spread is good because trading will be cheaper. But this is a zero sum game, right? So who's losing? Answer: the other "market makers". Because they don't earn the bid/ask spread anymore. This is why HFT is causing the demise of traditional market makers and daytraders. But: if you are a patient value investor and you put in some bids below the market and offers above the market you are ALSO a market maker. You are providing liquidity but chances are you will not get filled because HFT are providing liquidity at a better price! Suppose you want to buy Microsoft. The market is 30.29$/30.31$. You might think that's a good thing because the spread is "only two cents". But without HFT the quote would be 30.20$/30.40$. Now, if you enter a bid at 30.25$, in which situation are you more likely to buy the stock at this great price? (forgive me for promoting my own holdings). If you are a patient value investor, liquidity is not necessarily a good thing.