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Some long term investors are placing passive orders to squeeze out an extra penny on their investments. I.e., they are running a strategy that's a mix of long term speculation and market making.
Unfortunately for them (but fortunately for the purchasers of liquidity), they are getting crowded out of the liquidity selling market by people who focus solely on selling liquidity.
What's the problem here?
Earlier quoted context omitted.
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
I disagree. Most HFT is market making (passive trading with limit orders only), and they make most of their money from short-term and impatient traders, who account for most of the volume and repeatedly pay the spread. Long-term traders, by definition, don't trade very often so they're a small fraction of the total volume. And its the market makers who provide the liquidity (with limit orders) for the long-term trade…
By definition, HFT jump into liquid market and count on exiting illiquid markets faster than anyone else. That means that they don't actually bring a greater assurance that a trade will happen, in contrast to the traditional "market makers" of NYSE. The "flash crash" can be seen as a simple illustration of this but so could be the greater volatility we have seen in the last few years.
This was effectively legalised front running of the market, something that would normally get you sent to jail. In the name of liquidity, exchanges allowed this and of course they got paid big bucks by the big HFT firms.
The whole trading game is pretty corrupt. You would expect that given the amount of money sloshing around. For example we knew about market manipulation in LIBOR for many years. It was an open secret but now the regulators are "discovering" it because the political climate is such that fewer people are prepared to live with the big banks excesses.
Still there is plenty more ongoing manipulation going on in trading even as I write this. I am awaiting the day that the regulators will "discover" these. Some of the bond markets for example have proportional fill executions. So if you have the best price and are first in the queue, a big institution can come along and show an order in vast size, which they have no intention of trading, just to get a fill of the fraction they actually wanted. You of course are left high and dry with just about nothing of your order filled because proportionally it was tiny. It is an amazing sight to behold how these vast orders come along just as the market is about to move and then instantly disappear. It is clear to any trader that someone is working on inside information, but everyone (read: big money)is in on the secret so no one is telling.
Not sure it still applies as I have been out the trading game for a little while now, but in the past the big HFT's had a 20 millisecond window where they were allowed to see the market orders before anyone else. Thus they could see say a big buy order coming in and pull their offers or even take out the offers themselves, knowing that the buyer would have to pay up. This has the effect of raising execution costs for…
Not sure it still applies as I have been out the trading game for a little while now, but in the past the big HFT's had a 20 millisecond window where they were allowed to see the market orders before anyone else. Thus they could see say a big buy order coming in and pull their offers or even take out the offers themselves, knowing that the buyer would have to pay up. This has the effect of raising execution costs for…
You're referring to "flash orders". Those were discontinued in 2009.
an interesting analysis - results towards the end "The Final Score"
I don't get it. Some long term investors are placing passive orders to squeeze out an extra penny on their investments. I.e., they are running a strategy that's a mix of long term speculation and market making. Unfortunately for them (but fortunately for the purchasers of liquidity), they are getting crowded out of the liquidity selling market by people who focus solely on selling liquidity. What's the problem here?
This is a hypothesis, but the answer is probably something like: Lots of people want to demonize free markets, and HFTs are particularly easy to demonize because it's hard to see how they add value (although they do), but easy to see that they are ethically self-interested (which people also unjustly demonize).
My recommendation to HFTs to counter this would be (a) do a better job explaining the mechanics of how you're providing a valuable service; (b) do a better job supporting capitalism in general, on a moral level, in the public sphere of debate. Otherwise, you're gonna have to pack up shop and move to a more free country pretty soon (if there is one).
If you're a long term investor, and the particular minute of the day when you make your transaction makes or breaks your strategy, then you were effectively just flipping a coin with your long term strategy.
Earlier quoted context omitted.
I disagree. Most HFT is market making (passive trading with limit orders only), and they make most of their money from short-term and impatient traders, who account for most of the volume and repeatedly pay the spread. Long-term traders, by definition, don't trade very often so they're a small fraction of the total volume. And its the market makers who provide the liquidity (with limit orders) for the long-term trade…
I can't comment otherwise but I'd note that HFT is producing the illusion of market making without real market making. By definition, HFT jump into liquid market and count on exiting illiquid markets faster than anyone else. That means that they don't actually bring a greater assurance that a trade will happen, in contrast to the traditional "market makers" of NYSE. The "flash crash" can be seen as a simple illustrat…
Which "flash crash"? The one about a year ago or the one in the mid-60s?