>they provide a valuable price setting service to the market
[Citation Needed]
My thesis above is that there IS no value added. You're saying that they are being paid for value provided, but other than possibly causing the price to be updated more quickly (on the 100 millisecond scale mostly, but possibly as much as a few minutes sooner), I don't see how that provides any real value. And honestly I don't see how even helping the prices move a few minutes sooner adds any value.
In ALL the examples in the OA, if there were no HFTs and you simply WAITED a few minutes, then the people actually making trades would end up with better deals. Sure the market wouldn't be as volatile and instantaneous, but in what tangible way is that a bad thing?
So, again, how does moving prices a few seconds sooner provide value? The examples given all assume the market would be completely static without HFTs, which is obviously bogus. HFTs are only interested in stocks with minimum levels of volume, meaning there would likely already be a lot of liquidity, and they won't touch stocks with too little volume, where they'd actually be useful (OP or another HFT, correct me if I'm wrong).
I think extraordinary claims require extraordinary proof. It certainly seems to me and a lot of other people like they're stealing money from valid transactions by taking advantage of a corner case in the system; claiming that "price setting" adds value when in the very examples given they don't seem to add any net value (except when the HFTs are doing it wrong and losing money!) seems like an extraordinary claim. So where's the proof that the market wouldn't actually be better off without them?
No, I didn't ignore it. I've addressed it twice already.
For a third time: If the only example that causes someone to benefit is the one where the HFT is losing money, then HFTs are motivated NOT to help people.
So no, I don't count an example where an HFT screws up as a positive. If the best you can say is that "some of my revenues are redistributed to people who otherwise wouldn't have been able to make a sale because there were no other buyers for a particular stock", well, sorry, but that pretty much proves my point.
You're claiming to be a Robin Hood, but without the whole moral justification -- you're robbing from random people and occasionally giving some of your proceeds to other random people. The latter doesn't justify the former.
In that case, you shouldn't count insurance companies are positive. They only help their customers when they screw up and pay out benefits.
Incidentally, if you feel HFTs add no value, why do people choose to pay them? In my example (and in the real markets), there is nothing stopping Fry from posting a sell order at $10.04 and not trading with Leela. So why does he?
Your insurance company example is totally unrelated.
A well-run insurance company spreads risk among all of its customers. There are NON-PROFIT insurance companies that do an excellent job of spreading that risk around (Kaiser Permanente spends 95% of its insurance dues actually paying for medical care, for example). When you buy insurance you're not EXPECTING to have a problem, but you want to be protected if you do. When someone DOES have a problem, the insurance company hasn't "screwed up" -- the entire point of insurance is to cover unexpected problems.
The only time that the insurance company could be said to have screwed up is if they're losing money overall. And in that case they'll eventually go bankrupt.
>why do people choose to pay them?
Ignorance? Given how many times I've seen advice to never (or at least only rarely) place a market order, I have no idea why anyone does.
Or possibly it's just the "greater fool" theory: They will sell to the HFT if and when they think they know better than you do.
You're claiming that the HFTs are providing insurance to the people who are buying or selling? I find that to be a stretch, since the entire point is that you look for sure bets and attempt to only sell this "insurance" to people who (in your opinion) don't need it.
And frankly most people trading in the stock markets don't know they're even "buying" this insurance. If they did, then yes, I could buy your argument. But they don't. And the ability to choose makes all the difference in this case.
I'd like to hear from someone trading stocks for a mutual fund, and whether they would "choose" to pay an HFT.
The reason that we don't have market makers standing around in pits any more -- that computers can do the trades directly -- also implies to me that we don't need those intermediaries at all. There's a lot of economic leeching that goes on in Wall Street, and I suspect that much of it is obsolete. HFTs are merely another symptom of the same problem.
An HFT spreads risk among it's customers as well. When you cross the spread you aren't necessarily EXPECTING the stock to go down, you just don't want to take the chance.
The only time the HFT could be said to have screwed up is if they're losing money overall.
I find that to be a stretch, since the entire point is that you look for sure bets and attempt to only sell this "insurance" to people who (in your opinion) don't need it.
No, you look for bets with a 90% chance of collecting a $0.10 spread and a 10% chance of a $0.50 price drop (for a net profit of $0.04/trade across many trades). Actually, the odds are usually much worse than that, if your expected profit/share is greater than a penny, you are doing fantastically well. Any HFT who hunts for a sure thing isn't making any money - there are far more 51% gain, 49% loss opportunities than there are sure things.
>Any HFT who hunts for a sure thing isn't making any money - there are far more 51% gain, 49% loss opportunities than there are sure things.
There may be far more 51/49 opportunities. However, saying that HFTs hunting for sure things isn't making money is far from true.
I worked for a UHFT firm that had a winning percentage of more than 95% of the time. The 5% losers had VERY small losses too. All arbitrage trading. Not market making like everyone seems to be focused on in here.
[Citation Needed]
My thesis above is that there IS no value added. You're saying that they are being paid for value provided, but other than possibly causing the price to be updated more quickly (on the 100 millisecond scale mostly, but possibly as much as a few minutes sooner), I don't see how that provides any real value. And honestly I don't see how even helping the prices move a few minutes sooner adds any value.
In ALL the examples in the OA, if there were no HFTs and you simply WAITED a few minutes, then the people actually making trades would end up with better deals. Sure the market wouldn't be as volatile and instantaneous, but in what tangible way is that a bad thing?
So, again, how does moving prices a few seconds sooner provide value? The examples given all assume the market would be completely static without HFTs, which is obviously bogus. HFTs are only interested in stocks with minimum levels of volume, meaning there would likely already be a lot of liquidity, and they won't touch stocks with too little volume, where they'd actually be useful (OP or another HFT, correct me if I'm wrong).
I think extraordinary claims require extraordinary proof. It certainly seems to me and a lot of other people like they're stealing money from valid transactions by taking advantage of a corner case in the system; claiming that "price setting" adds value when in the very examples given they don't seem to add any net value (except when the HFTs are doing it wrong and losing money!) seems like an extraordinary claim. So where's the proof that the market wouldn't actually be better off without them?