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Comment by yummyfajitas | Hacker News Reader

tl;dr; Competition between HFTs has reduced margins on market making to near zero.

Wonderful news for consumers of liquidity, bad news for sellers of it.

That and this sad kicking in the groin of a system that's working through technology issues as it should:

Democrats in Congress would go further. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio want a .03 percent tax on nearly every trade in nearly every market in the U.S

Politicians just have to get in and start pecking for some extra revenue and attempt to give the illusion that they're going to help.

Interestingly Sweden tried a 0.5% tax in 1984:

> During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared.

Needless to say, 'tax avoidance' became the norm (especially since it was exceedingly easy to circumvent) and it was later repealed in 1991.

[1] http://en.wikipedia.org/wiki/Swedish_financial_transaction_t...

law of unintended consequences

In today's deficit boogeyman environment I can't say that extra revenue isn't a consideration, but really the tax was to attempt to stem a runaway financial system that has become the blood-sucking vampire squid[1] that's taking more and more of the wealth while providing little of value to the country.

[1] http://www.guardian.co.uk/business/andrew-clark-on-america/2...

Like the article points out, the inefficiencies of the market are being removed exactly because of these so called "vampire squid". Maybe we should call them "cleaner shrimp" instead, since they're performing a useful function?

Don't get me wrong, I tried my hand at some day trading a couple of years back and the HFTs helped to make it hard going. That was the problem with the business model I wanted to pursue at the time, though, not with the market itself.

More than that though, the robots only win when they're fighting panicked human traders who try to maximize and fire blind (or at least a few seconds slower). Speaking of intelligent programs, they failed to achieve equilibrium with their natural environment, as Agent Smith would say.

The takeaway:

  HFT also lacks the two things it needs the most: trading 
  volume and price volatility. Compared with the deep,
  choppy waters of 2009 and 2010, the stock market is now a
  shallow, placid pool.

Yes, that's the integral section of the article, but what it's really saying is that at least one component of this is the current cycle low in volatility and volume. This is a classic wall st shakeout when the best capitalized firms that make it through the down part of the cycle come back much stronger when their market returns because their competition closed up shop. They haven't scared everybody away, they're just suffering a market downturn in volatility and volume right now.

The robots win when people trade more and when prices move around more. When those conditions return, the robot party will be back on.

The second main point: with declining volatility, there is less space for HFT strategies to profit.

What I didn't see in the article was an explicit discussion of transaction costs. Transaction tax would increase those costs, but was part of the decline because transaction costs have already gone up?

Yep. They are currently scrambling into every market on the planet to try and eke out profits there but the pace is accelerated.

Before too long I think we will see HFTs merging until there are only a handful of players globally.

IOW, HFT is transitioning into a commodity.

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