From Reuters:
This happens every time something goes wrong on the stock market — every time there’s a flash crash, or a high-frequency trading firm blows up, or the Nasdaq is forced to go dark for three hours. A bunch of editors who don’t really know anything about HFT ask for stories about it, and they all want the same thing: a tale of how a small group of high-speed trading shops, armed with state-of-the-art computers, are using their artificial information advantage, and their lightning-fast speed, to extract enormous rents from the little guy.
The result is a spate of stories like Rob Curran’s latest piece for Fortune, which appears under the headline “Make $377,000 trading Apple in one day”. Of course, there are lots of ways to do that: one way would be to buy about 77,000 shares of Apple, for $37.7 million, and then watch them rise by 1%. But Curran reckons he’s found a better way — indeed, an easy profit which involves no risk at all. What’s more, this method is particularly evil, since apparently all of the profits that it generates are coming straight out of your pocket.
Curran’s story is based in large part on a “study” by Berkeley professor Terrence Hendershott. This study is never named, or quoted, or linked to, and I can’t find it on Hendershott’s web page, so I’m not going to blame Hendershott for any of the content of Curran’s article. Specifically, for instance, Curran’s sub-hed says that “A Berkeley professor finds out just how much a certain type of high frequency trading costs the average investor”. I suspect that Hendershott’s study actually purports to do no such thing*, and that “average investors” aren’t even mentioned in it. I say this because Hendershott is a smart guy, and I can’t believe that this kind of thing fairly summarizes any of his work...
...Looked at through Curran’s eyes, the “little guy” is always a price taker. He doesn’t go out there into the market posting offers and waiting to see whether anybody will hit them; he just looks to see what offers there are, and if he likes the price being offered, he takes it. That kind of investor — and there are a lot of them out there — has never had it so good, precisely because there are so many HFT shops these days, competing to provide liquidity to the buy side and to receive the small sums of money that exchanges pay to the price-makers rather than the price-takers.
High frequency trading, along with its close relative decimalization, has been fantastic for price takers. They get better prices, they get them faster than ever, and the transaction costs associated with a “round trip” — buying a position and then selling it again — have never been lower. There’s some debate about whether it’s easier or harder than it used to be to trade in size; the jury’s still out on that one, but technology like dark pools has helped there, too. And if you’re big, then there are no shortage of VWAP algorithms and the like which you can use to try to beat the HFT bots at their own game....MUCH MORE
