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Comment by nradov | Hacker News Reader

In theory the liquidity created by HFT lowers the cost of capital and increases economic growth. Whether it creates a net benefit relative to the profits it sucks out of the system is unknown. It would be quite difficult to obtain the data necessary to make that calculation, and all of the second-order effects would be complex to model.

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I think that a good way to estimate the benefit would be to compare how much less money HFT sucks out of the system than its predecessors.

Lots of other things have also changed since then. It's impossible to isolate the independent variables.

Would this not happen if we did the trades at human speed? Wouldn’t we get to the same result, in theory, perhaps just a little slower?

No, we ran that experiment. In addition to the fact that humans market makers actively colluded with each other to divert money from buyers and sellers into their pockets, the advent of automated trading also decimated spreads. I think maybe the problem is that even if the trades themselves are "slower", the actual underlying activity that the market is pricing isn't, and the gap between the real speed of events and the speed with which the market can price those events expresses itself in uncertainty and higher spreads.

what do you mean by "the profits it sucks out of the system"? How do you "suck the profits out of the system"? First of all, taxes are paid on those profits, secondly profits are reinvested back into the economy.

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