> effectively skim off of the top of the market

The problem with this point of view is that it implies they are just taking, and not providing. HFT provides a more accurate market price by providing liquidity at small price differences. Whether what they provide justifies their cost is another question though.

It's algorithms guessing about something in nanoseconds with little context. Feels like that would reduce accurate pricing. Not a finance guy, though, so my intuition could be wrong.

To make money, they have to be accurately pricing. If the spread on something was $0.50, meaning that there are people on record as willing to buy at $0.50 lower than others are on record as willing to sell, the real price is somewhere within that range. Presumably, the real value of the stock is somewhere in the middle, but we don't know, because there's not any transactions happening right now, and the real value of something is the value at which people are willing to exchange it. HFT firms provide liquidity, in a lot more transactions, and at smaller spreads than regular people are willing to do (because HFT firms can automate away much of the work). This results in a more accurate price (smaller spread), and you being more likely to sell at that price (even if it's to a HFT). At least, that's the theory.

I'm not a finance guy, but I've followed it here for quite a while, and this is my general impression of it. I used to be fairly anti-HFT until I learned more about it. Now I'm somewhat ambivalent, except for the topic of rogue trading algorithms, which seem fairly dangerous, but the genie's out of the bottle.

One of the most useful HFT tools is to reduce liquidity. Doing this over an hour would cost ridiculous amounts of money, but cornering a specific exchange over 0.01 seconds is cheap and potentially profitable. Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.

Hmm, in which case I guess it would be more accurate to say that HFT's provide some limited ability to control liquidity, whether that's increasing it or decreasing it.

Assuming decreased liquidity is bad (I don't know if there's situations where it's seen as beneficial to the market), the question is how to we disincentivize the use of the ability to decrease liquidity that HFTs have, or do we just accept it as a consequence of their participation, and accept that it happens from regular brokers as well?

What? None of that made any sense. The only way they can reduce liquidity is to stop trading, or buy it all up, neither of which is bad.

> Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.

Just no, that is not at all correct. HFT increases price accuracy, it doesn't reduce it.

Liquidity means the price is stable not that trades will go through.* Stable prices prevent HFT traders from making money.

Price accuracy is somewhat debatable. Many HFT traders may toss lot's of trades around at a price, but that does not mean you can buy or sell large numbers of shares at that price as they can easily just be trading relatively small number of shares back and forth.

*Dramatic price swings are often tacked onto this. But, that's also relative to number of shares traded. If selling 1,000 shares at ~20.00 each involves any price shift it's hard to call that stable.

> Liquidity means the price is stable not that trades will go through.* Stable prices prevent HFT traders from making money.

No, liquidity means there's limit orders sitting on the market. That is quite literally all liquidity is.

> Stable prices prevent HFT traders from making money.

No they don't, stable prices are good for market makers as it reduces the risk of flipping the spread. You can sit there all day long without prices moving a lick and make bank buying at the bid and selling at the ask getting pad the spread for providing liquidity; this is what HFT's want to do. Directional movement, aka volatility, increases the risk for market makers, aka HFTs as it forces them to predict a direction and makes their trades more risky. Yes, some strategies work better with volatility, but market making is the least risky when price doesn't move at all because you're not making your money from the volatility but from the pocketing the spread over and over.

> market makers ... without prices moving a lick

If orders are going though at different prices that's volatility, even if it's just bid ask spread. Reducing bid - ask spread is how HFT traders are supposed to reduce volatility in the first place. Trade at 10.10, 10.00, 10.10 is price motion even if the trades where buy 10.10, sell 10.00 buy 10.00 because a party needs to sit on the other side of the transaction so all trades are both buy and sell transactions.

That said, you can model only one type of transaction and talk about say sell volatility.

If the ask doesn't move, and the bid doesn't move, orders will happen at both prices due to market orders from both bears and bulls; if you'd like to call that "price moving" you're free too, but I won't. If you were staring at a chart you'd see nothing happening at all because charts don't chart orders, they chart the bid and ask or some middle between them. Regardless, you get my point, the bid and ask do not have to move at all for a market maker to make money, they would in fact prefer the safety of no directional movement.

> Feels like that would reduce accurate pricing.

Nope, exactly the opposite, it creates better pricing. HFT is a bidding war to see who can create the best prices and still make enough profit to survive, this reduces trading costs for everyone else by reducing the spread.

Isn't this exactly the opposite effect? You place a bid for what is currently showing on the market, and the HFT firms use their speed advantage go and buy up most of the stock at that price and relist it for a bit more. So the price is never what you actually think it is, it is what you see plus whatever the HFT firm decides to add.

HFT firms can't provide liquidity--they don't hold positions! At the end of the day their books are all 0.

This only works because the HFT firm is confident they can immediately sell at that higher price. That is, they have more, or quicker information than the market is aware of. This results in a more accurate price, because if the stock was prices at that originally the market would have shown it, and the HFT would have had nothing to do.

You can try to classify that as the HFT taking money the seller would have made if they had noticed and repriced quick enough, or taking money from the buyer if they noticed and bought at the original price, but I think both argument could easily be extrapolated to the rest of the stock market and regular users (this plays out quickly, on fairly public info, but it's the same process that goes into someone making a decision on what price to buy at and what to sell at, just sped up quite a bit).

That's not how markets work. If an HFT firm saw your order resting, means that nobody wanted to trade with you at that price in the first place.

If you cross the market then there is nothing the HTF firm can do. When it becomes aware of your order it will be too late. Of course the order you want to trade with might have disappeared while your order is in flight, but that would not be casually related to you sending the order to the market.

You're forgetting that "the market" isn't one monolithic thing anymore, it's a number of independent exchanges. Your order goes out to all of them, and the HFT firm sees it on the nearest market then races (and beats!) your offer to all of the other markets. That's why they care about nanoseconds so much, they're racing the speed of light. That's why you get a tiny fraction of your bid filled and then everything else suddenly dries up and is relisted at a higher price (aka Arbitrage).

That's grossly oversimplified and wrong.

> Your order goes out to all of them, and the HFT firm sees it on the nearest market then races (and beats!) your offer to all of the other markets.

No, they have no idea or way to know if your order was big enough to even go to other markets; if they rush out ahead of you and you don't show up, they lose money. What they do is not risk free.

> That's why they care about nanoseconds so much, they're racing the speed of light.

Incorrect. They about latency because all traders have always cared about being first to get their orders in and this would matter whether HFT existed or not. They're not racing the speed of light, they're racing other traders and that would happen no matter the speed of the trading. It's not the speed that matters, it's being first that matters. Even if you outlawed HFT, being first would still matter except it'd be human traders seeing who could push buttons faster.

If you were to buy the hose stock of an entire neighbourhood, would you expect to pay the same price for the first and last house you buy? And no, markets are not transactional you can't usually buy the whole neighbourhood in a single deal.

What's likely happening in your example is a large trade in one exchange triggering adverse selection protection across all markets from multiple market makers.

Exactly my intent. Well-worded. I'm not sure quite how to describe it how average person would understand. So, insider trading is one option to approximate it. Pyramid Scheme seems like another one in the rip-off aspect but doesn't fix the specifics as well. The traits to categorize are it's rigged, parasitic on others, requires enormous investment, and requires physical proximity that's fairly exclusive.

And all of those descriptions are wrong. They are not trading on inside information, it is not in any way a pyramid scheme or a rip-off, nor is it rigged or parasitic. If you think HFT is bad, you don't understand what it is. HFT improves market prices providing buyers and sellers with better prices than they had before HFT by narrowing the spread you have to pay to find liquidity. HFT is good and benefits retail traders.

> he traits to categorize are it's rigged, parasitic on others

I'm not sure that's a good way to frame them. If you frame them as parasitic, then the argument shifts towards how we can stop them, as they don't provide any value. HFT firms do provide value in liquidity and more accurate market prices. Whether the cost them impose for these is worthwhile is an open question, but then the argument is about how to tweak incentives and rewards to best utilize this resource, not how to prevent it from working at all. The framing matters.

> HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market.

That's entirely wrong. There's nothing safe about it, and they aren't skimming, they're trading exactly like every other trader is, making a guess and risking cash to see if they're right.