Earlier quoted context omitted.
>What is the benefit of trading over ms resolutions. What problem is it solving? The problem it's solving is that people want to do it. Exchanges on which they can't are outcompeted by exchanges on which they can. >Wouldn't trade be more efficient if it were lock stepped - say one trade per hour (per day?): No. >you agree your trade and the exchange processes it on the hour. You "agree" your trade outside the exchang…
> The problem it's solving is that people want to do it. // As a generality I'd say that's false. Why buy in to a system that makes a tiny proportion of the populous vastly wealthy only because those people already are wealthy. > You "agree" your trade outside the exchange? // No, hence the conjunction. Perhaps "you issue a bid or offer" would have been better? > Spreads would get wider // OK, can you give a reason w…
Because it gives you a better price. There are two sides to any trade; people go to the HFTs because their prices are better than anyone else's. If they weren't providing value, no-one else would trade with them.
> that makes a tiny proportion of the populous vastly wealthy only because those people already are wealthy.
HFT has greatly democratized market-making; in the old days stockbroking was an old-boy's network, virtually impossible for new participants to enter. Nowadays, three or four blokes with computers and one investor can start a new trading firm, and many of the biggest HFT players started that way.
>OK, can you give a reason why that happens and why it leaves more with middlemen
Because there's a higher risk. If I offer to buy microsoft for $50 but that offer has to stay out there for an hour, and news of a lawsuit comes out 20 minutes later, I'm going to lose lots of money. So the middlemen need to be able to bear that risk, they need much bigger capital reserves, and they can't afford to offer the penny spreads we see nowadays (because they need to make a greater profit to offer the same return on their bigger capital reserve).
> At the moment a change in price so transient as to pass in milliseconds gets exploited to extract value from the system.
Where's the value being "extracted" from? Certainly not from a fundamentals trader, who's getting the best possible price with the smallest possible spread (sadly, regulations require shares to be sold in increments of $0.01 and no smaller, so there's always $0.005/share to be made on every trade, which by modern standards is absolutely huge - and is why the HFT guys are willing to spend so much on low latency to maximize their chances of getting that $0.005/share. But the fundamentals trader always pays exactly $0.005/share; the HFTs are just fighting among themselves for who gets it).