If Eve had taken the day off, Alice would have traded with Bob, and it would have looked just as immediate to both of them.
This comment makes sense only in the context of a message board hypothetical, because it presumes foreknowledge on Alice and Bob's part. Here, Bob showed up. Eve looks like a genius. But it was equally likely that he wasn't going to show up.
A lot of the discussions about liquidity and HFT here seem a little innumerate. They appear to work from a scale where the hypothetical Alice's ask price is "absolute zero". That's not the real scale. Obviously, instead of Bob showing up at $10.05, you're equally likely to end up with Chuck at $9.95.
If you're not equally likely to get Chuck instead of Bob, why are you selling?
> This comment makes sense only in the context of a message board hypothetical, because it presumes foreknowledge on Alice and Bob's part. Here, Bob showed up. Eve looks like a genius. But it was equally likely that he wasn't going to show up.
Equally likely? So HFTs are flipping coins blindly and just happen to make a lot of money because they can flip quickly?
> If you're not equally likely to get Chuck instead of Bob, why are you selling?
I don't understand this question at all. I'm selling because I want to sell my stock. Maybe I'm liquidating assets to buy a house. Maybe I'm speculating that the market is going to tank. Maybe I'm just adjusting my asset allocation. I could be selling for any number of reasons, and I don't care about Bob or Chuck. I just want to sell and get the market price.
If you need liquidity but want to retain your upside exposure, there's a whole class of tradable instruments that does that for you.
If you need liquidity and aren't confident enough in your upside to want to be exposed to the downside, you're happy to have Eve.
Note well: your hypothesis is that Alice should get something for nothing. Alice wants liquidity (ie: no downside exposure) and immediate access to the next significantly better price to hit the market. It must be nice to be Alice! :)
As for your first question: HFTs do not have crystal balls. If they did, Chris Stucchio would be a billionaire.
For sure, HFTs don't have crystal balls. They certainly are able to leverage their market access to give them an advantage, though.
I feel like I need to reiterate that I don't think HFT is evil. I'm just not sure that HFTs really add that much liquidity to the market, and there is evidence that they contribute to volatility (such as the flash crash).
The "Flash Crash" was caused by a single, manually-initiated large block trade:
At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 EMini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.
(From the SEC link Chris posted earlier).
I don't know whether I believe Chris that HFTs caused the market to correct much faster, but it seems clear that HFT didn't cause the crash.
The SEC seems to disagree, and says that HFTs added to the drop. HFTs also apparently burned through about half of the trading volume just trading with each other.
> The combined selling pressure from the Sell Algorithm, HFTs and other traders drove the price of the E-Mini S&P 500 down approximately 3% in just four minutes from the beginning of 2:41 pm through the end of 2:44 pm. During this same time cross-market arbitrageurs who did buy the E-Mini S&P 500, simultaneously sold equivalent amounts in the equities markets, driving the price of SPY (an exchange-traded fund which represents the S&P 500 index) also down approximately 3%.
> Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.[9]
HFT didn't cause the flash crash, but neither did that mutual fund manager.
The primary cause was a delay in when incoming orders were time-stamped by the NYSE. Instead of stamping the orders when they arrived at the queue just before entering the market, the NYSE servers time-stamped them when they _left_ the queue and were placed in the book.
Since the queue was delayed by extreme volume (NYSE has always lagged on technology), stale prices were posted to the NYSE feed. However, it was impossible to tell that they were stale from the timestamps.
Since the market was falling rapidly, this resulted in the NYSE quoting higher prices than every other market.
Since the NYSE was quoting higher prices than every other market, arbitrageurs massively sold at the NYSE and bought on other exchanges.
Since the queue was delayed, however, the sell orders at the NYSE took a while to actually show up in the book. Meanwhile, more sell orders were placed.
This comment makes sense only in the context of a message board hypothetical, because it presumes foreknowledge on Alice and Bob's part. Here, Bob showed up. Eve looks like a genius. But it was equally likely that he wasn't going to show up.
A lot of the discussions about liquidity and HFT here seem a little innumerate. They appear to work from a scale where the hypothetical Alice's ask price is "absolute zero". That's not the real scale. Obviously, instead of Bob showing up at $10.05, you're equally likely to end up with Chuck at $9.95.
If you're not equally likely to get Chuck instead of Bob, why are you selling?