Yeah, but you'll notice the quote at the top of my post was basically saying that that friction doesn't matter at small enough intervals.
I get that you don't want too much friction in the market, you definitely don't want excessive surpluses or shortages of actual goods and to some extent that applies to securities.
But I see zero reason to care about the price of IBM in even a 1-minute interval. A little friction? Who cares, we're not impeding shipments of goods here, and even if we were, the 1-minute spread on a 6 month lumber future is similarly unimportant, to me at least. That's without even getting into seconds and milliseconds.
Basically, I'm saying that "but, liquidity!" gets less and less convincing as an argument as the time intervals shrink. At a certain point, we're just funding a very expensive and stupid zero-sum game with pennies out of all of our 401k accounts.
Doesn't it make more sense to make a firm argument for "why not liquidity"?
Who exactly is funding this expensive and stupid zero-sum game? Exactly what effect does this game have on your 401k? Isn't your 401k invested in index funds? Don't they trade infrequently and in huge, huge blocks? A no-load S&P 500 tracking fund is not HFT'ing the components of the S&P 500.
Doesn't it make more sense to make a firm argument for "why not liquidity"?
Sure. Why not strip clubs? And blackjack? I acknowledged that liquidity has value it's not an end -- it only has value in as much as it provides value.
I don't fully understand who's funding it, but I know the money comes from trade volume, and a big chunk if not the majority of the money on the market is there from institutional funds, 401ks, pensions, etc. Those that are actively managed get nibbled away at. Those that hold for longer (index funds do rebalance) get nibbled away at less frequently.
What's your hypothesis for where the trade volume that they make money from originates? They're just taking money from the rest of the financial industry?
I don't know where to start. I'm not saying you're wrong, just, I don't know where to start responding. And please feel free to mentally append "as I understand it" to each of these.
1. Funds of actively traded securities are nibbling away at you with or without HFTs. Actively traded funds are evil.
2. HFT market makers aren't nibbling at actively-traded funds. They're nibbling at other market makers. Like I said previously: an HFT market maker is bidding the price of liquidity down, not up.
3. Your 401k is almost certainly not invested in a fund whose strategy is passive trading and selling liquidity. Your funds have positions in the market. Passive traders do not take positions. Your 401k benefits (very marginally) from the tightened spreads created by HFTs. The people who don't benefit are day traders.
4. I have no idea what "strip clubs" and "blackjack" have to do with any of this.
Actively traded funds are not "evil." Actively traded funds are the only reason you can buy an index fund and actually expect a decent return. Without active traders, the market would be inefficient, i.e. things would not be fairly priced.
"We" aren't funding anything. We (401k owners) benefit minutely from the reduced friction, but it doesn't cost us anything; if hedge fund A gets their latency down to 1ms and so they get our buy/sell rather than hedge fund B that's running at 5ms, so what? It's not like A charges us any more than B did, and why should I care whether A or B gets the profit?
What's happening is commoditization, which you should be happy about - the only value the HFTs are destroying is their own profits. It's just like if PC maker A can sell hard drives 5 cents cheaper than PC maker B by building a faster robot - sure, I didn't really care whether my hard drive was $120 or $120.05, but I don't lose anything - why do I care whether A or B gets the profit?
I get that you don't want too much friction in the market, you definitely don't want excessive surpluses or shortages of actual goods and to some extent that applies to securities.
But I see zero reason to care about the price of IBM in even a 1-minute interval. A little friction? Who cares, we're not impeding shipments of goods here, and even if we were, the 1-minute spread on a 6 month lumber future is similarly unimportant, to me at least. That's without even getting into seconds and milliseconds.
Basically, I'm saying that "but, liquidity!" gets less and less convincing as an argument as the time intervals shrink. At a certain point, we're just funding a very expensive and stupid zero-sum game with pennies out of all of our 401k accounts.