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The Cost Of High Frequency Trading
Lately, as the topic of High Frequency Trading has gotten front page prominence, there has been much confusion as to the top line impact on traders that utilize HFT methods, and inversely how much of a "toll" on investors high frequency trading is. In other words: what is the cost of liquidity?
Some, such as the TABB group estimate this to be roughly $20 billion a year. Others, such as John Hempton believe this number is a huge exaggeration, and that HFT is practically a philanthropic act of shareholder-focused pro bono activity, practiced on behalf of benevolent banks and magnanimous market makers, armed with massive collocated computers.
Zero Hedge decided to take a look at the facts. Conveniently, none other than specialized brokerage ITG (whose CEO Robert Gasser incidentally recently banned 3rd party algorithms from accessing its POSIT dark pool, and told analysts on the day of
the decision that 'third-party dark aggregation has not been beneficial
to our institutional POSIT constituency.' One wonders why SIGMA X is an exception in this regard) provides a historical trend in what is known as Implementation Shortfall costs, which allows one to determine HFT liquidity-provision costs.
Implementation Shortfall, also known as Slippage, is the toll HFTs collect from investors - this is, on average, the cost of spread and frontrunning. As per ITG's definition:
Implementation Shortfall (IS) Costs – comprised of 2 pieces:
- Timing Delay Costs - Any delay cost incurred between the Initial Decision (Open on Day 1) and the Broker Placement Price. Think of this as the cost of Seeking Liquidity.
- Market Impact Costs - Price change between the time the Order is placed with the Broker and the eventual trade price.
What is the numeric representation of IS costs? ITG provides a historical breakdown here:
The first immediately obvious thing is the gradual decline in Commission Costs over the past 5 years, as traditional venues for trading have been replaced with commoditized, HFT trading protocols: this has forced agents to compete based on cost, driving commissions ever lower: without doubt a benefit to investors who have reaped this one particular benefit of HFT.
Yet what is troubling is that IS costs, which have been relatively flat over the past 5 years, skyrocketed over the second half of the past year, with a particularly notable jump in Q4 of 2008 - the days of the turbulent and volatile equity market post the Lehman collapse. Also, the dramatic increase in IS, which averaged 53 bps in 2008, is among the primary reasons why HFT operators in 2008 had a record year, and why firms like RenTec had a massive return difference between its market-neutral HFT strategy (Medallion, with 42% annualized returns since inception and a 5.3 Sharpe ratio over the last three years) and its long-short 175/75 quantitative strategy (RIEF, with deplorable returns). Also, the recent ramp up in HFT by firms such as Goldman Sachs via the NYSE's Supplemental Liquidity Provider program may be a major clue as to the record number of $100MM + trading days in Q1 and soon, in Q2.
So what is the bottom line? Observing the volume of NYSE stocks traded globally one gets an average number of just over 6 billion share daily.
Taking the 6 billion daily average, and applying an average stock price of $20/share and using the assumption that HFTs represent 70% of the volume, while capturing 50% (and according to Zero Hedge sources, this number could be as high as 90%) of the 53 bps average IS spread in 2008 results in HFT slippage capture of over $220 million daily on NYSE stocks alone. And this does not even count rebates. Taking this one step further, assuming 250 trading days in a given year, brings the total annual costs to investors (and revenues to HFT strategies) to over $55 billion. If one expands this methodology to non-NYSE member stocks and exchanges, a reasonable guess for HFT tolls in the US alone to be over $100 billion.
One can see why HFT is a sacred cash cow for the limited group of participants who benefit from "providing liquidity."
Recently, the market cap of U.S. listed stocks was just under $12 trillion: if the total annual cost to investors is indeed in the $100 billion ballpark, which they fork over to the likes of Goldman, RenTec and others for providing liquidity, it means that the liquidity premium of stock trading has increased to 0.8% of total assets.
Of course, arguments can be made that this is a fair price to pay in exchange for having daily liquidity available (although the debate of whether liquidity=volume is highly relevant) at our fingertips provided by thousands of computers which trade millions of shares every second. The bigger question is what is the potential for abuse of this highly under the cover P&L item, and have firms such as Goldman simply become a toll aggregator as a result of persistent stock churning and liquidity provisioning. As $100 billion is over 0.5% of the recently released GDP, does it not make sense to more actively evaluate whether the HFT market would benefit from some substantial anti-trust intervention, which in turn would promote higher competition and the break up of the highly profitable trading monopoly of a very select few?
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You are missing one of the major sources of slippage: the arms race. Traditional asset managers like mutual funds and pension funds are spending hundreds of millions probably billions on computers, consultants, and software to keep up with the rapidly evolving trading process.
High Frequency Trading will come to an abrupt halt when too many of these gamers micro-trading "leading stocks" along a momentum line get shanked when the stock is slammed on an earnings warning.
Imagine some 22-year old short-term trader gunning his computers to buy and sell a stock thousands of times a day, earning vast profits, only to see 3 months of gains wiped out in one fell swoop when the stock gaps down on earnings (e.g. AMZN, AKAM, SYNA, FSLR, etc.)
Ouch!!
Yeh, too bad it doesn't show Fedor coming back 30 seconds later and putting Kevin in a kimora (if my memory serves me correctly, don't know how to spell it either).
It's kimura
And the hits just keep on rollin' along for the chum churners...
BTW, excellent as always..
Robotrader, much more like they hit YOUR bid 1 ms after the headline when their keyworded newsfeed printed the bad earnings.
So it will actually be YOU who gets blown away.
sorry, you're such a nice bot.
these programs do not run overnight... they are SHORT TERM...
Emelianenko vs Randleman, love that fight.
Clearly, because you're forced to trade every stock every day regardless of any major events that everybody's aware will take place.
It's RIGGED... when a stock shows 2 million shares traded, and you figure that is enough volume to be a non-manipulated stock, think again! In actuality there are probably only a few thousand shares being traded by actual humans.
Institutions (gansters) simply divide up territory... technology changes nothing but the avenues they roam.
Floor specialists need not apply.
Notice that until the last year's market hiccups there's been a long-term downtrend in these costs. This is the positive effect of HFT. This graph only shows the tail end of a decade-long HFT-led reduction in costs. In the old days Saluzzi and his gang would take 12-25 cents per share - now the HFT players compete over fractions of a penny per share. It's not philanthropy but it still benefits retail and institutional clients greatly.
Um, Have you ever watched these bots in action? They are NOT into price discovery, rather they tend to move the price away from bid/ask pressure.
How can that be of benifit to any TRUE investor?
Friday's top gamed stocks by dollars traded:
My prediction is that we will soon see SPY trade over 100 billion dollars daily. That's a lot of lotto tickets flying around.
SPY SPDR S&P 500 ETF 98.81 +0.14 +0.14% 207,357,955 20,489,039,534 BAC Bank Of America Corporation 14.79 +0.82 +5.87% 375,051,946 5,547,018,281 EEM iShares MSCI Emerging Markets Index ETF 35.78 +0.17 +0.48% 119,533,753 4,276,917,682 C Citigroup Inc 3.17 +0.03 +0.96% 1,107,978,233 3,512,290,999 IWM iShares Russell 2000 Index Fund 55.57 -0.23 -0.41% 40,482,436 2,249,608,969 XOM Exxon Mobil Corp 70.39 -0.33 -0.47% 28,071,609 1,975,960,558 SDS ProShares UltraShort S&P500 ETF 47.261 -0.149 -0.31% 38,352,247 1,812,565,545 FAS Direxion Shs Etf Tr 57.57 +1.006 +1.78% 31,323,593 1,803,299,249 XLF Financial Select Sector SPDR ETF 13.01 +0.13 +1.01% 131,306,212 1,708,293,818 JPM JPMorgan Chase & Co 38.65 +0.18 +0.47% 39,089,490 1,510,808,789You estimate that HFT represents 50% of the shortfall but this is impossible to estimate.
Consider: An investor makes a decision to buy a stock because he thinks the price will rise. If it rises before he buys it that is shortfall/slippage. But if it rises it means he was right! Maybe most of the shortfall was due to superior stock-picking ability.
Front page of FT has a video of Joe Saluzzi.
http://www.ft.com/home/us
Joe is great.
Tapeworms provide volume to the digestive system, do you want one?
I'm going to take everything out of the Stock market and other venues that are sacrificed on the altar of inside information and investing it in true market demand and supply driven ones in cocaine, marijuanan, baseball cards, comic books, and tulip bulbs.
Maybe spices,silk,tea and bananas, too.
This electronic trading thing was doomed from the start to become as artificial as Loni Andersen's tits.
Loni Anderson's tits are fake?
as fake as Burt's hair.
You picked the worst example imaginable. Loni Anderson once had breast reduction surgery.
As fake as "RobotTrader's" avatar above.
One wonders why SIGMA X is an exception in this regard
Their program that gave them the edge walked out the front door in a briefcase. Now it is out there and once broken down, will be used to compete with them. So limiting access to the data is the next logical step to continue to keep your edge.
Ya really think so..
Your projections are based on a firm that doesn't allow access to its dark pool.
I would expect their slippage number to increase dramatically as a result. Does the increase coincide with their policy change?
Extrapolating from this source is dramatic, but misleading.
If ITGs 53 bp is the industry norm, then you may have a point. If not this analysis is garbage.
Tyler, I've got a number of problems with your back of the envelope.
1) the assumption that HFTs represent 70% of the volume - is based on the TABB report. I believe that this number is inflated, but will have to leave it at that, as I have no data to justify that position. What should not be in question though is that as the overall volume changes (denominator), the percentage attributed to HFTs will also change. To make the point - if no humans traded for a day and volume dropped to 1M shares, it would be easy to assert that 100% of the trades on that one particular day were from computers, trading with each other (presumably 500K adding liquidity and 500K removing liquidity). The 100% of course is meaningless in that context. I bring this up because in Q4 2008, there were many humans making trading decisions, and I would hazard a guess that a much lower overall percentage of trades were from computers than are say in Q2 2009 where we are seeing relatively low volumes.
The point I'm trying to make here is that you can't use the 70% figure (even if you believe that it is correct, which I do not) as a static figure in multiplying it against the spread figures. The 73% from TABB using whatever method they used was likely a peak figure, and the 53bps is a peak, but the 2 likely happened at different times.
2) I don't know how the IS figures are calculated... and when a trader decides to make a trade and what price they get is of course a function of volatility and the latency on the trade being placed. If these orders were phoned in, then the increase in IS could just be due to higher market volatility in the face of slow order execution. I will attempt to churn through a series of bid/ask spreads for the entire US equity market and come up with a data series later - as this article has gotten me interested in what's happened to the spreads, but I don't think there will be material differences in posted bid/ask spreads on US equities over the last year. Of course, it may make a difference as to how each person doing this analysis weights the various components (volume transacted, market cap, even weight).
3) "And this does not even count rebates." Nor does it count for the SEC, clearing fees, fees paid to the ECNs for data and connectivity... all of which help account for the reduction in commissions as seen by the average retail trader. The rebates are greater than these other fees, but not by a whole lot.
4) "Taking this one step further, assuming 250 trading days in a given year, brings the total annual costs to investors (and revenues to HFT strategies) to over $55 billion". Now, lets say we're with you to this point in time and ignoring all of the fuzzy numbers - what would the costs on spread have been had the computers been shut off? The spreads would have been wider, but no one can say how much wider... and that is a benefit to the retail investor which you do not mention nor attempt to quantify.
w/r/t point 4, i agree and you are right - my point is that this liquidity provisioning is being focused in the hands of a few who could potentially find incremental loopholes to increase IS even higher as the oligopoly shrinks (the latest campaign against FLASHing could be indicative of what to expect by NYSE, NASDAQ, etc - not saying it is right or wrong) which is very concerning. But yes, there is a tradeoff which is why the post is subtitled "the cost of liquidity."
Tyler,
I haven't had a chance to sit down and respond to many points of this post but I will pose one question for now. What was the median order size of this study that experienced 53 bps of implementation shortfall slippage? What was the median ADV of the names in the study (statistics can be manipulated to convey any message you want.. a 100k share order slipping 53 bps in GE is terrible, a 100K share order slipping 53 bps in Google is pretty damn good).
What do you think the median RETAIL order size is? Do you think that order size experiences 53 bps of IS slippage? I understand that the IS slippage of institutional (mutual fund) traders is a direct cost to the retail investing public, but I think at the median, its the cheapest its ever been.
Aside: In the agency execution business 5 Years ago slipping 2 cents off of VWAP was considered success, now VWAP is a commodity. VWAP is an obtainable execution benchmark for large orders, IS is NOT.
Signed,
Bevo.
Too subtle, Your key point is valid and should be included in the headline in each of your analytical posts.
this liquidity provisioning is being focused in the hands of a few who could potentially find incremental loopholes to increase IS even higher as the oligopoly shrinks
This is the alarming theme underlying all your coverage, and bears constant repeating. Your expanding fan base is still climbing the learning curve here.
the NYSE policies of implementing volume increasing policies that are meant to 'stabilize' the market. prior to the market these policies were not as outright solicitious, but it's not like HFT didnt exist prior to the crash. And it's not like anyone is stupid enough to think that HFT can be 'regulated' out of existence.
An event like this crash had the potential to actually destroy the NYSE and drive trading permanently to other platforms. the NYSE responded by trying to make it look like the recession is not so bad and that 'everyone' is still in the market with its SLP -volume rebate program to get market insiders to increase their trading volume. so the NYSE saved its own ass. that's all. 'rebates' don't make the NYSE any wealthier, they pay off goldman and others to retard a decreasing revenue situation and possible destruction of the NYSE. you really can't blame the nyse. the stock market is not a public entity. and while regulated, it still needs to fund its own existence.
if you want ot get rid of colocation to prevent front running. then go for it. it seems like a smaller tighter argument to say that front running is illegal, and on the principle that the appearance of justice is important, the NYSE should be prohibited from allowing any computers to be located on the exchange premises for a fee. the colocation scheme must be open for free to anyone, or must be closed.
anon 22395: And it's not like anyone is stupid enough to think that HFT can be 'regulated' out of existence.
----------
Technically, it is easy to regulate high frequency trading out of existence. You just impose a securities transaction tax on the gross revenue that is greater than the spread someone makes from the transaction. Longer term trades shoot for higher spreads, so they wouldn't be affected much. It would be like shutting down spam with a tax on email.
One can debate whether shutting down HFT is desirable or politically possible or likely. But technically, shutting it down is not rocket science.
Why don't E-Trade and the like pony up for co-located servers? Not a huge deal if their commission rate goes up by a couple of nickels. The big boys have to pay up for that service. Why do you expect to get it for free?
http://mjperry.blogspot.com/2009/07/growth-in-ecri-index-hits-fresh-five...
ECRI Index says end of recession?!
ECRI uses government numbers. So..the recession is over.
BATS seems to be flagrantly violating the rules about locking the market. They give an example (para #3) of going high bid which matches the offer; but, what about going low offer that matches the bid? Wouldn't that violate the uptick rule?
Also, what's with Joe Ratterman denying "UNIQUE" front running?
http://www.batstrading.com/resources/newsletters/2009-08-Commentary.pdf
BATS can make it's own rules. It's a seperate exchange.
From Reuters:
http://blogs.reuters.com/commentaries/2009/07/31/high-frequency-fuzzy-math/
Zirp: But Goldman is talking only about high-frequency trading of stocks, not options and commodities.
----
There's also high frequency trading in FX, rates, and bonds, which Goldman isn't talking about in claiming that less than 1% of its revenue is attributable to HFT. And by pure coincidence -- no doubt -- FX, rates, and bonds are done in GS' big money maker (lately), the Fixed Income, Currency and Commodities Division.
right. so they are running a multidimensional strategy. some of it is linked to the equity (shares) market. It is the underlying for many things, so they you can influence where it goes, they can make a lot of money in the other (e.g. options) markets.
in short, we are not analyzing the market activity of people, we are analyzing the algorithm (and the thinking of the programmer(s) who wrote it).
zzzzzzzzzzzzzzzzzzzzzzzzzz
Right on point, Tyler. Thank you!
John is just trying to get publicity. The only problem with it is that he is wrong and will stand by being wrong even in face of things like facts. You would think someone from a "fundamental background" would appreciate fact over opinion which he frequently falls back on. Ego's can be an ugly thing, I would hate to be an investor in his fund they usually end up blowing up because they don't concern themselves with facts but rather opinions.
The increase in implementation shortfall in the last year may just be due large investors all trying to buy the same stock at the same time or sell at the same time like last fall. I don't think its because HFT have gotten any better at getting profits. Also, many of these recent articles on HFT seem to imply that most of the profits from HFT is going to a select few but I think mutual fund and hedge funds also are large participants in high frequency trading or liquidity providing.
Also I might add the obvious: implementation shortfall for retail stock pickers is close to zero. The cost of implentatuon shortfall is going to large institutional participants who want to make a large transaction in a single day. 50bps is a pretty reasonable cost for the ability to get that kind of liquidity anytime they want it.
For those who care to get Mr. Saluzzi's take on this topic, I will interview him this evening at 8pm.
http://www.senseoncents.com/2009/08/reminder-sense-on-cents-interviews-joe-saluzzi-regarding-high-frequency-program-tradingsunday-night-at-8pm/
I was able to catch the last half of this interview, thanks a for having him on. I appreciate his clear explanations of the issues.
anyone who uses market orders or stop orders is naive. they shouldn't be trading until they wise up. using a limit order to match a bid/ask, depending on which way you're going, results in the minimum slippage.
slippage is not some new bogeyman. the bid ask spread is a fact of trading life. it always has been. this controversy is just high frequency bellyaching. some people swim with the sharks. others like Mr Saluzzi are over squawking with the chickens.
ITG data comes from Plexus subsidiary (a supplier of transaction cost analysis (TCA), trade research and consulting services) which captures 50% of traditional buy side data.
Thanks, so the 53 is based on a data from 50% of the buy side.
I'm not a statistician so I don't know if that sample size is adequate to support your conclusions, but thanks for the disclosure.
Seems to me that you have done some serious analytical work on this post TD and I compliment you, though I'll admit the deeper you go into the HFT matter, the more it is a bit (okay,a lot) over my head. That said, I'm still learning.
I think I am going to try some HFT starting tomorrow on my brand spanking new $298 deflationary depression special Compaq purchased from WalMart.
oops
oops
don't exchanges limit the number of high frequency trade messages sent to them per second for various types of traders, eg- market makers get X amount, prop traders, Y, etc...?
fantastic article, well done
I am not entirely clear why the market would be not be able to clear efficiently without the presence of these liquidity providers. I have assumed that the market-makers lower their bid/asks in response to falling demand.
Supposing that demand for US equities contracted- and those around me certainly seem less interested in participating- to such a degree that 'churning' became an attractive option for the exchange(s), then how come the program hasn't been undertaken by the government banks?
I don't suppose anyone who dreamt up this response would think that the market participants would fail to discover the details of the scheme. Coming on the heels of a derivatives meltdown, it seems a somewhat perverse calculation to have handed the keys to equity prices to a sub-AI computer. The consequence has been a poisonous reaction from the human traders and a terribly slow one from the 'regulators', and others who indeed quite unambiguously label the exchanges as their own property.
-just to add some realpolitik-
My concern is that, in search for something less efficient than power, the investment bank model is being resuscitated -under a complex model of equity financing that we know is understood poorly- by the same thinkers who draw upon the utility of Central banks.
With China,India and Russia now open to the global markets, there must arise a struggle between socialist and capitalist paradynes which will succeed in moderating economic behaviour. The NYSE is clearly stating a monetarist preference despite engendering a lack of trust in doing so. As with the bank holding companies, I feel that the NYSE has mis-appraised its own relevance, certainly with regards to the knowledge economy.
Regarding Loni Andersons's breasts, as they seem to have generated some interest. They're only fake in the sense that they've been reduced, not enlarged.
http://www.imdb.com/name/nm0000756/
I don't get the basic claim that the High Frequency Trading provides liquidity. It's not logical. Are you telling me these guys buy stocks that no one else wants? If they buy stocks that no one else wants, how can they sell them again in 3 milliseconds if no one wants that stock?
This is like claiming that tapeworms aid in digestion.
Very often, positions are held for much longer than that (seconds to days).
There may be a non computer-buyer and a non-computer seller, and they may have prices that would trade with each other, but unless they are both willing to transact at the same exact time, no trade will occur. So... you can add liquidity to the market by not even improving the prices that the humans would generate, just by being at the right price at the right time, and bridging the time gap between the natural buyer and seller.
Does anyone know if HFT is occurring in the futures exchanges, too? Or is this purely a stock phenom?
That was good for a laugh. thx.
tyler your post is nonsense. implementation shortfall characterizes the trader's dilemma of market impact vs opportunity cost. IS is not a measure of HFT success. It is most useful to measure performance of orders large enough to have a measurable market impact. The trader tries to find a schedule of order placement that then minimizes the opportunity cost incurred by slowing down the order to remain under the radar.
One incredibly simple explanation for higher IS costs is higher intraday volatility, because that will tend to increase the variance of opportunity costs.
No high frequency strategy uses IS as the performance benchmark, I guarantee it. Your article is another mash-up of half-understood bits and pieces from the trading world, of which you are, judging from your lack of knowledge, not a part.
Agreed. This is typical of Zero Hedge, a lot of great timely content and opinion, but often-times only half understood. Notwithstanding this, still a great site and currently the only of its kind. The only way too break news, aggressively offering cutting edge analysis, is to be willing to make mistakes.
not trying to start an argument and correct me if i'm wrong, but if what drives a pm to trade a block of stock, be it crossing a ma, rsi divergence, spike in price/volume, or whatever is the same as what is driving a HFT program in the same stock and the computer trades in front of the block and triggers other HFT trades which removes enough liquidity to materially move the market which would increase slippage and then computers turn and trade back to the block buyer/seller then they are increasing the cost of trading and in fact pocketing the increased cost whether that is their initial intended strategy or not.. that is if you can track an increase in slippage to increase in HFT and they are truly a substantial majority of the daily volume - not saying right or wrong as scalpers in chicago have been doing that since the day they opened the pit but it would be material if they did hold that kind of daily market share
has been a while since i traded size for institutions and really mostly pre-HFT but there is little doubt that in certain circumstances "front runners" whether an HFT computer or NITE or a day trader increase slippage but they are a fact of the market and most traders i have ever dealt with took this into consideration during an execution and i imagine they are still doing it knowing their actions may trigger an HFT front run
imo, in time these computers and algorithms will meet the laws of diminishing returns like every other arb strategy in history
Antitrust/RICO was eviscerated long ago, with the exception of a few high profile token actions to prove they exist, or actions against ex.Microsoft because of Chicago School and failure to adequately pay off both sides of the aisle. It's demise synchs nicely with rise of OTC/nasdaq, anonymous/disclosure exempt transactions, M+As, deregulation, dark pools - just to randomly name a few. HFT just another entitlement on road to further concentration of wealth and power. Justifications are the usual (40 year old) suspects: liquidity, efficiency, transparency, risk.transformation. I like the Tomatoe Bubble link and solution it implies.
Why is there so little REVELATION OF THE ACTUAL TECHNIQUES BEING USED ???
What are the algo's? What markets are they correlating? Is is only frontrunning size?
WTF is actually going on!!!!!!
Don't worry, bots are here to help. Very kindly, selfless bots just want to make your life easier.
Just relax, relax, relax.
OK, you're going to feel a little pinch here...
"WTF is actually going on!!!!!!"
what's actually going on is called market making. market makers use limit orders to provide quotes for buying and selling a security or some derivative of that security. this provides market liquidity, which in this context merely means a ready, willing, and able counterparty for most transactions.
no individual or firm would ever engage in market making without being able to make a consistent profit. hence the bid/ask spread which tends to enable the market maker to profit by buying at one price and selling at another. that profit is not always an automatic foregone conclusion, though, because markets constantly move with differences in buying 'pressure' or selling pressure. certain circumstances, events, shocks, and panics like we experienced in 3-4Q '09 can cause spreads to widen substantially. the market maker 'dances' with the market to try and make a few points(cents) here and a few points there. there's no denying that market makling is profitable for the capable.
the actual market making strategies are dynamic and proprietary(confidential) to the individual or firm. that's understandable because ANY market strategy has a shelf life that is inversely proportional to the number of people who know about it and/or the scale on which it is being traded. so the machines tend to render themselve ineffective even as they change, due to the scale on which they trade.
"What are the algo's?"
algos merely take very huge orders and break them up into pieces that can be more easily moved in the market. huge counterparties are sometimes hard to come by especially during an economic shock. and once again very huge action tends to move a market and widen the spread.
that should give some idea of the concept of market making. right now profit is being demonized because of obscene bailouts and corresponding bonuses. that's the zeitgeist. that's the emotionally charged environment we have. that's understandable.
one more important point. markets are predatory. they always have been. they're continually weeding out and killing off the marginally capable. that's how our world works.
it's always easy to know who these incapable people/entities are. they have a scapegoat and they're outraged.
That's a very cheap argument, you guys use them a lot. Am I an ex floor trader, too? I'm up for the evening, so far, how bout you?
I invented a way to make markets with a CDA (Continuous Double Auction) technology in 1996 to prevent market makers from abusing their double-role as 'brokers' and 'dealers.' I invented this as a way to build a CDA engine for the hollywood stock exchange.
This is the US patent for a "virtual specialist technology"
http://tr.im/vfnA
This technology is currently being warehoused by Cantor Fitzgerald for the purpose of maintaining the current system of toll collecting. My point being that the question is not so much, do the markets gain a net benefit from the this supposed 'liquidity' factor.. but rather, why do these Wall St. banks refuse to use the Virt. Spec. technology or something similar to eliminate this glaring flaw in the whole market-making paradigm.
The answer is obvious, and it's the same reason many drugs don't make it to market, or that MSFT can sit on their predatory monopoly position for decades: corruption.
The technology exists to enable better price discovery but it's purposefully being kept from market from market 'dictators' like GS, JPM, etc. for whom 'rent-seeking' of this type is highly beneficial.
signed,
max keiser