I think you're confused by what "spread" means. It doesn't mean that for every transaction, we're getting a cut of investor money. Think of it this way.

Say MSFT bid is $99.50 and ask is $100.50. That means you can sell for $99.50 and buy for $100.50. What market makers do is tighten that spread so it becomes $99.75 and $100.25, for example. Now in the first situation, if you wanted to buy 100 shares you would have paid $100.50 per share + broker fees. Let's say broker fees are zero. You just paid $10050. In the second case, you would have paid $10025, saving you 25 dollars. Note that broker fees are the same in both cases.

In reality, the MSFT spread is much tighter thanks to fast market makers, so you would probably pay $100.02 per share, so you would actually save closer to $50 on that transaction. Intense competition among different market makers makes it so that every stock has as tight a spread as possible. Think of any business that's competing with price -- offer products at too high a price and your competition will sell for less, adding value to investors and taking profits for themselves.

That finance in general has such a large percentage of GDP is unfortunate. But you're getting off-topic. If you're attacking the entire financial industry, I have no responses for you. Banks, hedge funds, etc. etc. I don't associate myself with all of them. My main point is that high-frequency trading is a technology, and it can be used for good and bad. Example of a good is tighter spreads, which I explained above.

I should have been clearer. By zero-sum, I didn't mean that someone always gets screwed. I meant that someone always loses money, someone always wins money. But they can both win at life. You are very familiar with this. You buy food. You lose money. But you gain calories. The store earns money. Both players win, but the sum of money exchanged is zero sum. That is what I meant. If you actually read beyond my comment to the lines below, you would have understood it as such.

The concept is not so esoteric as you make it out to be. In every trade, someone loses money and someone makes money. However, they can both win. Absolutely. It's like generalized insurance. You give up money to protect... your risk, your crude oil exposure, your stock exposure, inflation... It's not like the "market" is this evil construct where common sense no longer applies. You buy something and lose money in exchange for other factors you end up gaining. And it's not like anyone is forcing you to trade. Just as you don't have to buy at a certain store, you don't have to trade certain products.

You mentioned something about trading once a day. That's actually not unreasonable, and I have arguments to support and refute the suggestion. That's a separate topic though.

Again, I think you mistake what the stock market is doing. When you decide to buy a stock, you're not looking at instantaneous price actions. You're probably listening to your brokers, who has much more information about your habits than the market, and as a result has much of a better chance at manipulating you than the market ever will. No trading firm is going to force you to trade. You can buy a stock and sell it four years later. That's fine. High-frequency market makers provide (as explained above) tighter spreads so that you can save $50 on that MSFT transaction when you enter and exit.

You don't pay "thousands of pennies" on thousands of transactions. Please refer to my first point. When the spread gets tighter, the exact opposite happens -- you actually save thousands of pennies. Your broker actually may have an incentive to cheat you out of your money because he probably gets incentives for trading on certain exchanges. You see, exchanges are also a business, and the more flow they can command, the more they make. They might pay brokers a kickback in exchange for flow, and you may never know about it. My point is that brokers are not intrinsically more ethical than traders out on the market. Good brokers won't cheat you. Good market makers won't manipulate the market. Fast traders are not intrinsically evil.

I will ignore your sensationalist rhetoric. I've talked to brokers and liquidity removers. They're much happier that the execution slippages are so low nowadays, thanks to tight spreads. You can read about many public fund institutions that serve long term investors and how they rave about how easy and cheap it is to buy and sell stock, and as a result, charge investors like yourself less to invest in your 401k.

A market maker adds value to the markets through tighter spreads and continuous availability. You cannot deny this. Designated market makers go all the way back to the early days of floor trading. The only difference now is that everything has become electronic. Now, are there people unfairly utilizing their knowledge of technology to disrupt the market? Yes. Are there people manipulating price action to fool other traders? Yes. I cannot deny that. But that's my main point -- electronic trading is a technology. It can be used for good and bad. You cannot deny the function that market makers bring to the marketplace. What you can debate about is how technology is being used incorrectly and how it should be regulated. I agree on that point. Cars kill people; but they add the value of transportation to society. So we learned to regulate it and live with the casualties.

You're right. I should have used the word "disclosure".

You are correct. If Waddell was the proverbial straw that broke the camel's back, the trading that occurred afterwards was the pack of hyenas feeding on the camel. The flash crash would not have happened without Waddell, but without the rabid selling afterwards, the flash crash would probably have been more of a flash blip. So you do have a point.

However, my point still stands. HFT is just a style of trading, not a strategy. You didn't need to be HFT to short sell E-minis that day. You didn't need to be HFT to be Waddell. You didn't need to be HFT to manipulate price action and take advantage of the panic. Any click trader who recognized the plunge would have sufficed. Those who sold the market did so because they were opportunistic traders, not because they were HFT.

The purpose of my post was that with new technology comes responsibility, and the quicker we realize that HFT is just another piece of technology, the faster we'll get to regulating it properly.

The fast market makers buy and sell lemonades at $1.00 and $1.01 respectively what banks are buying and selling for $0.10 and $5.00. Our customers are everyone that trades with us. We tighten spreads and save institutions millions in execution costs.

You're trying to paint every person working in finance with the "evil brush". There's more to it than that. You're frustrated with the collapsing housing market. Frustrated with corrupt corporations. Not every financial firm is Enron. Keep that in mind.

Thanks for the ad hominem. If you care to elaborate on any of the arguments posed, I will be happy to hear it.

Care to elaborate?

For every trade, there is a buyer and seller. Buyer makes X, the seller loses X (barring fees). The sum of values exchanged is zero.

The reason why the stock market exists is that it's not zero-sum utility. Like insurance, some people are willing to lose money in order to hedge out a risk or move risk to different products. Nonetheless, trading is absolutely zero-sum.

You're not barred from purchasing machines that are close to the exchanges. Contact your local exchange liaison and he'd be happy to set it up for you.

Is it an "unfair practice" if it's openly available to anyone who's willing to pay? Is it cheating if the CVS store closer to you gets more business than the Walgreens farther from you?

There are many actual instances where trading firms DO cheat. Educate yourself and you'll have much better arguments. Flash orders, for example. But co-location is not.

I have no idea what kind of conspiracy theories you're talking about. Are you complaining about the rampant speculation and panic in many markets? I don't see how that's related to HFT. I'm not defending speculation, nor am I defending market manipulation.

Most firms do not have enough capital to unilaterally push the market in one way or another. If the market's behaving erratically, it's usually because of the majority of players thinking in a certain way. If the value of the dollar falls, everything will rise in price, especially commodities.

You're confusing flash orders, which is indeed illegal -- they allow firms to get a peek at customer orders before the orders hit public exchanges.

But being fast as a competitive advantage, given that everyone receives the same information -- that's something entirely different. By the same argument you're making, Google should be fined because they have infrastructure that's vastly superior to the average person. If the average person wanted to compete with Google, he or she would need to build too many things.

I'm being a bit facetious, obviously, but you have to distinguish these concepts.

You bring up the valid points I was trying to get at. People should recognize HFT for what it is -- just a technique. A way to do something. Not a strategy. People used to deliver mail with cars. Now people use planes as well. The fundamental value-add is the same; the way in which it's being done is different.

You have strong feelings against the financial industry in general. I understand. Enron screwed over thousands of people with their shady tactics and outright manipulation of their finances. Banks used their position and superior knowledge of the markets to sell unsafe products recklessly and brought down the housing market. Unlawful HFT firms started using flash orders to their advantage, peeking at client flow before the information hit the public exchanges.

At the end of the day, every for-profit business is trying to make money. So don't pretend that we are alone in that respect. The only difference is that as consumers, you don't really understand the value of a few pennies being saved over billions of transactions. We may be saving the US economy, in aggregate, millions and millions. For any one person individually, it will be insignificant.

You have it backwards... shorter hold times = smaller risk. Longer hold times = larger risk. Do a thought experiment with a random walk. For any given period of time, there is a measure of expected move (0) and variance. If you hold positions longer, you're more likely to suffer more swings.

Your confusion arises from the fact that there are two problematic things here: market failures and HFT evils. Yes, HFT evils do exist. Flash orders are evil. They allow HFT firms to take a peek at orders before they hit the public exchanges. They should be eliminated. Step ups in options are not fair for similar reasons. They should be eliminated.

But something like the flash crash on May 6 was largely due to market failures. Someone bet that the US economy was going to collapse -- to the tune of $4.1 billion dollars. Some exchanges, for some reason, started quoting products at 1 cent. These failures contributed to the massive market swing.

Market making HFT is a continuation of... designated market makers back in the day. People would manually be assigned the task to provide liquidity for certain companies. Again, not all HFT is good. I'm sure there's HFT firms preying on unfair data and naive customers. But let's not throw the baby out with the bath water.

E-mail is used for the so-called "Nigerian" scams. Guns are used to murder people. Technological progress doesn't wait. The most annoying thing about this whole debate is how people are unaware of the bigger issues at hand. Monopolies in the currency exchanges forcing spreads that are 5% the price of the product. Consumers unknowingly buying illiquid, unregulated derivatives that banks charge exorbitant fees for, only to have those derivatives blow up and destroy the entire market.

I don't know why you're so opposed to the idea that there are things machines can do better than humans. Perhaps you can enlighten me on where you are coming from? Your arguments seem to belie a deep-seated dislike for everything HFT.

Anyway, being faster is tangentially helpful to consumers, in the sense that we're competing against each other for market flow. Pepsi and Coca-Cola probably worry about producing 12328 bottles per assembly line per day. Who cares if they produce 12328 or 12329? As a consumer, you just want your bottles. In market making, being faster allows us to manage risk better. We stand publicly so that investors can trade against us. Sometimes, someone will put in a massive order (probably some pension fund) and we will all get huge positions that we need to liquidate quickly. The fund gets a cheap price for all its shares, and we have the difficult task of liquidating it as quickly as possible. That's where our speed comes in. It may not benefit consumers directly, but because we can manage risk better, the spreads are thinner, thicker, and pension funds that manage your 401k can get more volume done at once.

I do agree that the arms race is unfortunate. Many in the HFT community wish the arms race to stop. If you think about it, the only people who benefit from this arms race is the arms producers: the companies that dig holes into the Earth to create a network line faster than any existing line. In order to simply stay in business, HFT companies have to fork up some dough for those lines. Trust me, we hate what this arms race has begun.

Also, please try to separate "market failures" and "HFT evils". The flash crash was caused by faulty technology and an irresponsible trader, NOT HFTs. The exchanges were quoting some products at 1 cent... Waddell bet $4.1 billion dollars that the US economy was going to tank... All of these events added to the events. With technology comes trouble. When cars were first introduced, everyone got worried about safety. Do people still die from cars? Yes, it is very unfortunate. But progress is not going to wait.

If you got this far, I commend you for having the patience to read an opposing viewpoint.

Discrete auctions could work. I can't think of any a priori reason why periodic auctions wouldn't work. They might even make the market place more efficient.

However, if you're willing to listen, I'm inclined to disagree.

First, investors get utility out of a continuous market. It's like having a convenience store open continuously from 8:30AM to 4:00PM, not in periodic intervals.

Second, that system still favors super-speed traders. Think about it. People will submit their quotes, but the market won't match them until after a period of time. That means the last entrant has the most advantage. As a result, you'll still want the fastest programs, best connections, the best programmers, etc. Even if you make everything hidden until the match (as in a dark pool) you can still process worldly information and wait till the last microsecond.

Third, that system will widen the spread, the difference between the lowest ask price and the highest bid price. Think about it. Let me stretch out the time so that it makes more sense in an everyday context. Imagine you're doing a lemonade stand business. You buy from suppliers, sell to consumers. If you were forced to only buy and sell once a month, instead of every day, what kind of limitations would you face? You would probably be extremely wary of overstocking, because the oranges might go bad (do they? let's just say they do for now). You could probably get away with charging more per drink because people know it happens so rarely. As a result, the costs of having to deal with the increased risk of holding the unsold oranges for longer are passed to the consumer.

There are dark pools, which you can read about. In such exchanges, all quotes are private from all participants. Only the machines see the quotes and generate matches. Obviously, you can probably back out information by analyzing your own trades, but because a lot of information is hidden, many institutions prefer to do volume on dark pools. However, as much as dark pools solve issues, they are somewhat bad for the market as well, because a lot of trading is done secretly. Average investors like yourself -- or anyone, for that matter -- has no visibility into the quotes -- the price discovery -- that are being generated.

There are different flavors of exchanges, all trying to solve the problem of risk transfer. You're not alone in advocating auctions. But it might not have the intended effect.

Thanks for reading the post, instead of just the first line. The food people are buying to feed their kids is probably cheaper because of HFTs.