> The (HFT) profit has to come from somewhere. And I'm pretty sure they come from the other market participants. If that's the case, clearly some market participants are getting a worse deal than they'd otherwise have gotten. At the time scale of seconds, trading is a zero sum game. Perhaps there's something I'm missing?
Can you work through a specific example for me? Previously, before automated trading, specialists would make markets in specific stocks, and people who traded with specialists would pay larger spreads than they do now. I've claimed that "being willing to take on risk" is a valuable service worth paying for, and that most people in most markets pay very little for it now, as a result of their counterparties selling the service for very cheap. It is of course possible that some subset of participants could work out deals among themselves and end up with a surplus as a result, in the same sense that it's possible that you could stop going to stores and buy everything directly from suppliers by driving to their warehouses, or start your own stores or whatever.
> > [capturing surplus due to short-term inter-venue mispricings] is actually called out elsewhere in this comments section as a value-destroying activity etc.
> Yes that's how I also understand it. Is this description incorrect?
It's not incorrect, but in your other comment you said
> If the HFTs looks at different exchanges and work as gel between them, making the trades between exchanges that otherwise wouldn't happen, that would make sense as a valuable business. Is that their purpose?
Which precisely describes the activity that you now agree is value-destroying.
> I'd consider automated trading and HFT to be orthogonal concepts. I totally see the benefit of automating trading, but I don't see the benefit of HFT. The 100ms number was selected small enough to be faster than any "real" "tangible" "physical" process in the economy, but still way slower than HFTs.
I don't think this is reasonable. If you are engaged in automated trading and you occasionally place resting orders on a limit order book, you need to be able to cancel those orders very quickly some of the time. The only alternative is that you believe that capturing surplus due to short-term inter-venue mispricings is value-destroying and that *failing to let other people destroy value by interacting with your resting orders when you know that you would prefer that they do not* is also value-destroying. That would be a surprising set of beliefs.
As an aside, there's a proposal quoted elsewhere in this comments section for FBAs[0]. I don't have a sophisticated opinion on these, but my first impression is that if FBAs replaced much of the existing market structure then the need for anyone with resting orders to cancel their orders on very short notice could become dramatically less frequent.
Can you work through a specific example for me? Previously, before automated trading, specialists would make markets in specific stocks, and people who traded with specialists would pay larger spreads than they do now. I've claimed that "being willing to take on risk" is a valuable service worth paying for, and that most people in most markets pay very little for it now, as a result of their counterparties selling the service for very cheap. It is of course possible that some subset of participants could work out deals among themselves and end up with a surplus as a result, in the same sense that it's possible that you could stop going to stores and buy everything directly from suppliers by driving to their warehouses, or start your own stores or whatever.
> > [capturing surplus due to short-term inter-venue mispricings] is actually called out elsewhere in this comments section as a value-destroying activity etc.
> Yes that's how I also understand it. Is this description incorrect?
It's not incorrect, but in your other comment you said
> If the HFTs looks at different exchanges and work as gel between them, making the trades between exchanges that otherwise wouldn't happen, that would make sense as a valuable business. Is that their purpose?
Which precisely describes the activity that you now agree is value-destroying.
> I'd consider automated trading and HFT to be orthogonal concepts. I totally see the benefit of automating trading, but I don't see the benefit of HFT. The 100ms number was selected small enough to be faster than any "real" "tangible" "physical" process in the economy, but still way slower than HFTs.
I don't think this is reasonable. If you are engaged in automated trading and you occasionally place resting orders on a limit order book, you need to be able to cancel those orders very quickly some of the time. The only alternative is that you believe that capturing surplus due to short-term inter-venue mispricings is value-destroying and that *failing to let other people destroy value by interacting with your resting orders when you know that you would prefer that they do not* is also value-destroying. That would be a surprising set of beliefs.
As an aside, there's a proposal quoted elsewhere in this comments section for FBAs[0]. I don't have a sophisticated opinion on these, but my first impression is that if FBAs replaced much of the existing market structure then the need for anyone with resting orders to cancel their orders on very short notice could become dramatically less frequent.
[0]: https://academic.oup.com/qje/article/130/4/1547/1916146