Also "oft-cited liquidity that they provide" >>
This argument is farcical to the nth degree. When the average time for HFTs to hold onto a new position is less than 30 seconds, I'd say they're merely claiming credit for liquidity that was already there.
"Algorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exogenous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes. "
To put it another way, how do we know the function of liquidity to net human benefit is monotonic (always increasing) rather than having a local maximum?
lower spreads means you pay less when you trade, simple.
Imagine it - "Earn cash in your spare time - estimate the future profits of Fortune 500 companies, and plug them into a structured database! Senior members represent us on boards of directors, telling CEOs what the computer thinks they are really worth! (payments contingent on the long-term value of your work)."
However, to suggest that the entire 100 are needed to liquify when 10 will do (less than 30 seconds later I might add) is farcical.
> For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery.
its not just a question of who will buy, its a question of who will buy at what price. if you have more liquidity suppliers, spreads will thin and you'll pay less.
I freely admit that if you want to measure liquidity as the amount of buyers in the marketplace, then HFT definitely increases liquidity. However, to suggest that HFT is the only source of liquidity, as I've said twice before, is farcical.
Also, it is totally accurate that HFTers reduce spread in the marketplace. They also increase the spread when they are driving the price of a stock up. Also, HFTers aren't unique to affecting the spread in the market. Every large scale buyer can change the spread.
Not only that, but my original point regarding the provision of liquidity and HFTers claiming they provide the essential job of supplying it (ie: without HFT, there would be no buyers) and I used the short period of time of the average stock position holding to suggest that the liquidity exists regardless of the existence of HFT.
The issue is not whether a 30 second hold on a stock is better / worse than a 3 year hold but whether stock markets still serve their purpose of providing capital for companies. The vast majority of trades are for stock that does not capitalize the company.
This is factually incorrect. A lot of ultra-high frequency trading refers to a practice where traders post a bid or an offer--their orders sit in the 'book,' waiting for other to come and trade with them. The traders who have bids and offers sitting out in the market are even referred to as liquidity providers (as opposed to liquidity takers). There are whole exchanges out there which offer rebates to such traders for providing this liquidity (which means you actually get paid by an exchange to post liquidity).
These guys are not in the business of holding positions, they are in the business of providing trade-able liquidity. A car dealer may buy your car, then turn around and sell it the same day--that doesn't not mean they are harming the car market.
I realize the semantics of this can be argued ("existing liquidity doesn't preclude or prevent the existence HFT" for example), but not only do I think that is a wash argument but it also misses the point entirely on the utility of HFT.
HFTers don't have to justify their existence at all. They exist because they are able to profit and their existence is not against the law. As far ethics and morality, I guess that is what we are arguing here :)
Liquidity is not pregnancy, there can be a little of it.