They fold and far less profitable than they use to be is due to the fact they are competing against each other. Simply, whatever advantages one has...the others have it too and they are competitors.
If you read about market crashes like say 1987 market makers did not step in and provided liquidity either. Market makers are not required to provide liquidity but rather fair and orderly markets. Anyway no one can provide liquidity for the currently issued paper simply because the money has not been printed yet. And this is the very reason for HFT existence to create illusion of liquidity.
The arbitrage is amongst individual firms. Their only risk is in out front running each other via the arms race. It's like having 8 banks in a city and 20 groups of competing bank robbers with police that look the other way. They're not all going to individually benefit every single time but it doesn't change the fact that it's still thievery.
The problem here is not HFT firms. The problem is a broken system. The SIP is not working and PFOF should be eliminated. I think the anger is pointed in the wrong direction.
this is my understanding. there are 1000 aapl on the offer at 100 spread over 13 exchanges and dark pools ( which are raping their clients ). 100 shares are on BATS at 100 and the rest of the 900 shares are spread amongst the other exchanges. A firm like fidelity so happens that they want to enter an order for 1000 aapl at 100 , they enter it at market or a limit at a touch above market. As soon as they hit the button they only execute 100 at 100 in BATS and the 900 other shares get executed at 100.99, like faster than you can blink your eye..thats the speed you have to wrap your head around in order to understand...WTF you say, the market was just showing 1000 at 100 and now they got executed at a 100.99...ok so it happens no problem..the problem is that it was happening not once or twice but always. the order would arrive at bats first and get executed, before that order got to the other exchanges which where located miles away the offers were already purchased by HFT robot algos who would have the offer lifted to 101 they would then offer it at 100.99 and fill fidelity's order... So basically the argument is that the quotes us slow moving less than an eye blink investors are seeing on our monitor doesn't represent the true market at least in regards to the final execution of the order... why would any exchange offer a rebate for taking away liquidity...1434 profitable days out of 1435 wow...cmon meng
Elcubano. I think the more likely explanation is... Some firm, like Citadel is paying Schwab (as an example) to take their flow. The NBBO is 99x100, and a Fidelity customer puts an order in for 1000 shares @ 100. Citadel checks around and looks to buy shares less than 100 on whatever venue it can find. If it so happens that the SIP is still showing 99x100, but the exchanges have shifted down in that split second to 98x99, then Citadel can buy @ 99, and give the Fidelity customer a fill at 99.9999. This is payment for order flow. You can blame Citadel, but you need to blame Schwab just as much. And the system even more.
Trust me I'm not blaming the HFT's, it's legal. More power to them. Just think for one second though, why would citadel pay for order flow which is taking away liquidity, why would anyone for that matter. Why would an exchange pay the broker a rebate for taking away liquidity? and when you have 5 years of trading and only 1 losing day it's more likely the explanation I have given.. ;o)
Big money in PFOF. IMO, this is about as riskless as it gets in trading. You know the price the customer is willing to pay, you know how much they want to buy, you know what others are offering to sell. Easy money if you can get the gig. The inverted exchanges were designed (I believe, and I'm mostly guessing) for those that want to get out now without crossing. They will be assured of being filled first because an aggressor wants the rebate. This one day of losing business is pretty simple. Law of large numbers. They only have a 52% win rate. But trade often enough that losing days hardly exist.
So when a booth clerk sign bid 3000 lots to her filler on the floor, what do you think we were doing before the broker could turn round? Riskless front running? Face it. Someone is always going to have an advantage over you. I dont care if thats fair or not, I just deal with it and do what Ive got to do. There are ways of seeing what algos are up to and screwing witht hem as a discretionary trader. Because they are 'mechanical', you know what their next move is likely to be.