> Actually. I think that licensing HFT traders would do > nothing more than to create a "special" group. My own > approach is that NOBODY should be special. It ought to > be a truly level playing field, so that the rules which > apply to me as an individual retail trader/ investor > should apply equally to the largest investment bank, or > whoever. There should be no privileges for anyone.
I agree, but there are currently some distinctions that get made by exchanges/in law for various reasons:
- market maker status (comes with benefits and obligations) - retail / wholesale investor
> I'm not yet persuaded to believe that HFT practices > perform any useful functions. For instance, in the > matter of creating liquidity, they may do the job, but > while it may make for smaller spreads and make the price > discovery route less erratic, nevertheless I think it's > probably debatable as to whether cluttering the market > process with a myriad of often tiny and basically > meaningless trade orders (which may or may not be > transacted) contributes any greater accuracy in the
Great point. The thing is though - a lot of this effect (the skimming down of the market depth) is actually more an EFFECT of HFT, rather than evidence of what HFT's are doing themselves.
HFT's (here I'm using the definition from my articles - the fastest guys in the market) are relatively confident at quoting size in the depth. It is the other guys (the ones who know they are not the smartest - not HFT) that are more nervous about it. They skim down their orders to avoid "adverse selection" - ie. avoid being picked off when the market moves against them.
The fact is though, we largely have opinion to go on here: there is no data in the public domain that answers the questions on what it does in terms of creating (and destroying liquidity). My views are based on what I know about HFT strategies, what is possible with technology, and the inevitable mathematical outcome. What I'm working on at the moment is creating such a database to answer these questions as actuals - not "probablys".
> determination of a fair or proper price, although it > MAY make a stock more readily tradable (but where's the > benefit in that for the average trader, if it means > he/she is, in all likelihood, being ripped off by some > manipulating algorithmic trader?)
Remember you don't need to be HFT in order to be a "manipulating algorithm". In fact I'd say the vast majority of algos that you would think fit that definition would not be HFT - as they are not particularly fast.
> Of course, for the big boys, on the other hand, high > liquidity is of great value, since it allows them to > buy/sell large volumes of stock without adversely moving > price. > So, who should have the advantage, the little guy or > the big guy? It seems their needs are different.
Interesting point, but remember that even though you are little - you probably move in and out of similar securities to a lot of other retail traders. So liquidity is just as important to you as the big boys. They just take a lot longer to execute their orders, and are very opportunistic in trading large blocks (dark pools and broker crossings).
> Well, there doesn't have to be conflict since the big > guy now has the option of using dark pools. Consequently, > there is no need - for the sake of liquidity - to have > algorithmic traders on the regular exchange.
You made that connection too! :)
Algorithmic trading is just automated trading, I think it would be hard to implement a 'blanket ban'. It doesn't need to be predatory, or create imbalance: you just need to either: get smarter, or change the market rules so they don't reward speed. (see my TimeMatch proposal)
> What other useful functions do HFT traders perform on a > regular stock exchange?
It all comes down to giving you someone else to trade against. The problem with the bad HFT is that it adversely selects you - you trade against it when you didn't want to, and didn't when you did. Check out the blog for informed v uninformed investors, and adverse selection.
