> financial markets aid in allocating capital for real world investment.
this is only one purpose of financial markets. the other purpose is to transfer risk. any capital that you hold is subject to risks, and as a capital owner, you really only want to be subject to the risks that you know about and can compute well. you'd like to transfer other types of risk to other parties.
> It doesn't even work on a per-minute basis - at best, it works on a daily basis
is this a joke? if AAPL releases earnings at 10am and they come in 20 cents under expectations, i can guarantee you that regardless of the presence of computers, by 10:01am, AAPL is going to trade down a lot.
> It certainly reduces the spread. The problem is that HFT makes market access unequal.
lower spreads mean that less profitable strategies can survive in the marketplace. there will actually be more market participants in this type of scenario
> You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect
what you're describing here is a limit order, the most basic type of order that everyone has access to. she puts in 10.05 in etrade, and gets filled if the market moves up to 10.05 (but not if the market moves down towards 9.95 and does not come back up).
> for most market participants form the real economy, intra-day fluctuations dominate the spreads by orders of magnitude anyway
this is exactly why latency is important (and also contradicts your earlier statements). you want your orders filled now, before the market moves away from you.
this is only one purpose of financial markets. the other purpose is to transfer risk. any capital that you hold is subject to risks, and as a capital owner, you really only want to be subject to the risks that you know about and can compute well. you'd like to transfer other types of risk to other parties.
> It doesn't even work on a per-minute basis - at best, it works on a daily basis
is this a joke? if AAPL releases earnings at 10am and they come in 20 cents under expectations, i can guarantee you that regardless of the presence of computers, by 10:01am, AAPL is going to trade down a lot.
> It certainly reduces the spread. The problem is that HFT makes market access unequal.
lower spreads mean that less profitable strategies can survive in the marketplace. there will actually be more market participants in this type of scenario
> You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect
what you're describing here is a limit order, the most basic type of order that everyone has access to. she puts in 10.05 in etrade, and gets filled if the market moves up to 10.05 (but not if the market moves down towards 9.95 and does not come back up).
> for most market participants form the real economy, intra-day fluctuations dominate the spreads by orders of magnitude anyway
this is exactly why latency is important (and also contradicts your earlier statements). you want your orders filled now, before the market moves away from you.