> Are they "trading" or "high-frequency-ripping-off-retail-investors"?

HFT doesn't cost retail investors anything.

apimade 18 hours ago | parent | next [-]

Liquidity providers like Jane Street, Citadel, et al make money on the spread. They also buy order flows from integrators, and retail investor order flows are now a product.

i.e. retail investor → brokerage platform → clearing/execution infrastructure → Jane Street → payment back toward the brokerage side of the chain.

Who captures the economic value created by retail order flow?

Jane Street.

In an ideal market, this product line shouldn't exist. Institutional investors should not be making money on the activity of retail investors.

What incentives determine where that flow is sent, and would investors receive better execution if their orders were exposed to genuinely competitive price formation rather than privately internalised by a concentrated group of wholesalers?

The regulators should be squashing any HFT related or retail order flow, but it's so opaque _by design_ that getting policymakers, or the general public, to understand that retail investors are paying some portion of tax on their $20T USD annual trades to these companies.

Granted, these order flows _sometimes_ work the other way -- and retail users get a better deal on a trade.. But would you really expect the market to be worth what it is, if that was the case less more often than not?

There is a clear and obvious conflict: the broker is supposed to seek the best execution for the customer while potentially being paid by the firm receiving that customer’s order. How can that be, when the broker's in bed with the liquidity providers?

	▲	loeg 16 hours ago \| parent [-]
		PFOF and HFT are distinct concepts, but they are widely conflated in this thread. I don't agree that PFOF is inherently bad, but even if it were: it is not a valid criticism of HFT.

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SanDiegoSun a day ago | parent | prev | next [-]

HFT raises pricing for retail traders by allowing front running of trades and makes the market less competitive overall for those without the infrastructure to do so. This isn’t even in question.

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loeg 21 hours ago | parent | next [-]

No, it doesn't. HFT lowers spreads for retail at the cost of slower market makers -- hedge funds. HFT isn't front-running (which is illegal).

	▲	apimade 18 hours ago \| parent [-]
		[dead]

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phil21 21 hours ago | parent | prev [-]

It's very much in question. As much as I hate to admit that since I do not like the concept of HFT existing as it's not providing very much value to society (imo) compared to the money made. The intellectual power behind this stuff would be much better put to use for something productive.

It likely lowers the transaction costs due to adding liquidity and narrowing bid/ask spreads for small retail orders.

But indirectly it likely raises costs for institutional investors like pension funds and large ETF managers making giant block trades on behalf their beneficiaries.

So tldr; Probably fractionally better pricing for your $5k GOOG trade, fractionally worse for your VOO holdings over the long term.

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lokar 21 hours ago | parent [-]

Does it really hurt institutional traders? How? Is it based on the idea that they can’t get the retail spreads? Because there is no world where they would have ever gotten them. A market maker would loose money doing that.

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phil21 20 hours ago | parent [-]

I'm certainly no expert whatsoever. This is just my understanding from talking with a few folks I consider quite smart who work in the space. Some working for HFT firms, some elsewhere. Also reading on the topic over the years.

There does seem to at least be some evidence that HFT firms decrease retail spreads overall. Either way, my main point being made is that negative impact to retail traders is very much in question.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183806

	▲	lokar 20 hours ago \| parent [-]
		That seems to be about a fee change that increased costs for market makers, widening spreads.

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Retric 20 hours ago | parent | prev [-]

Market makers are simply an artifact due to how shares are traded based on limitations that existed before computers. The aren’t some inherent aspect of having a stock market.

The money isn’t coming from thin air. If N people trade a a finite set of shares back and forth every day the only way to extract money from that set of people is for them to lose money.

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ralph84 18 hours ago | parent [-]

Yeah, the stock market may be positive sum over the long-term, but it's certainly zero sum over the millisecond-term. Whether it's "retail" or "institutional" that is paying for HFT profits, it's all retail in the end.

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loeg 4 hours ago | parent | next [-]

> it's certainly zero sum over the millisecond-term.

Why do you think market-making is zero sum? Providing liquidity has value and market makers are compensated for that. (Milliseconds of liquidity being appropriately compensated with fractions of pennies.)

	▲	Retric 2 hours ago \| parent [-]
		> milliseconds of liquidity Speed of light delays. Due to the underlying physics of the universe there’s physical limitations on how much liquidity can matter on sufficiently small timescale.

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Anon1096 18 hours ago | parent | prev [-]

The millisecond-term zero sum game is part of what allows for a positive sum long term. For example, zero fee trading was pioneered by Robinhood and only possible because of payment for order flow, and as a result it's virtually unheard of now for retail to be paying per transaction. Now more retail investors can participate and everyone benefits. You can also point to lower spreads and faster execution as direct benefits.

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Retric 8 hours ago | parent | next [-]

> zero fee trading

Such wonderful marketing terminology.

That’s not actually free, the cost of trading with less information is quite high.

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ralph84 17 hours ago | parent | prev [-]

Or you could just hold auctions a few times per day and eliminate the billions of dollars spent trying to win a pointless race.

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loeg 16 hours ago | parent | next [-]

No one wants four-trades-a-day settlement to save 0.00001% or whatever in trading fees.

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ralph84 6 hours ago | parent | next [-]

No one? Mutual funds have managed to attract $33 trillion trading once a day. The demand for millisecond-level trading is almost entirely from a very small group of firms profiting from it.

	▲	loeg 4 hours ago \| parent [-]
		And they are steadily losing new investment dollars to ETFs, which trade interday. I don't think interday trading is why ETFs are more attractive to all or most investors, but a 0.000001% (or whatever) cost advantage just falls below the noise floor. It isn't worth any other tradeoff.

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amenhotep 14 hours ago | parent | prev [-]

That's true, we don't want it to do that, we want it to kill these parasitic entities. Much like one doesn't swat a mosquito because one will truly miss the amount of blood she's taking.

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naveen99 11 hours ago | parent | prev [-]

Then the real trading will just move to hyper liquid or another platform that allows trading in real time.