This is not a political thread. I understand that Bernie/Hillary are in favor of taxing canceled orders and HFT to discourage short term speculation. I guess their thought process is that financial markets are there for investing, or buy-and-hold. Does that mean that with the absence of HFT (probably discouraged by this tax) retail traders will benefit by being able to trade concise, non-choppy trends? Please don't discuss politics.
The most profitable form of HFT is market taking. Usually with IOC orders. The profitability of market making is about 1/2. the profit margin of market making strategies is very very thin and very sensitive to fees to the point where any fee > 1c per contract on futures would have a pretty noticeable impact on the posted size. Taxing cancels would probably be even more punitive to the point where there would be quite a bit less liquidity. Actually, my guess is that then market makers would still make money because everyone would be forced to quote less aggressively so the predatory market taking HFT would probably get hurt much more. Volume would certainly go way way down so exchanges would move their products offshore to get away from the tax. And yes, they are absolutely set up to do this. Remember, the exchange itself doesn't need to move anywhere. They just need to list their product on a foreign subsidiary which is very easy to do.
1. Are markets 'messy'? 2. If so, is there any proof (charts for comparison or other data) that they are more 'messy' post -HFT versus pre-HFT?
It is not about trends but about the quality of fills and cost of execution related to fills. Most large buy side houses have performed extensive research and have found that hft harms the quality of their fills and hence their cost of execution went up which is why they joined the battle and nowadays almost all employ hft algorithms themselves in order to get their orders filled more efficiently and less costly. Neither society, nor day traders, nor investors benefit from hft, and that the hft industry disagrees is obvious, one needs to really pay attention and think hard about the arguments made on either side.
The market makers never lose money, at least not for long. If they tax trades, just like SEC fees now, the spreads get worse and retail traders pay. If they tax cancels, the spreads will be much worse on volatile things, and the retail traders pay. sure it would be terrible for the market, even buy and hold flagship Vanguard has praised HFT for their tight spreads and liquidity, but politicians do dumb things all the time. Hopefully this won't be one of them.
Vanguard's cost of execution fell by 2/3 in recent years and they attribute this to HFT competition narrowing spreads and providing liquidity. But since you don't believe me, hopefully you'll believe Vanguard's CEO and the CIO when they say HFT has been very good for their investors. http://www.forbes.com/sites/alexand...r-thanks-high-frequency-traders/#5c0510c12534 http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html https://www.sec.gov/comments/s7-02-10/s70210-122.pdf
As long as hft's play fair, i'm not gonna complain. They win fair and square with speed. Anytime speed beats somebody, the guy that got beat complains. Way back in the day mm's did't particularly care for soes orders, then when preference orders ripped them off, they didn't like that either. Now the hft's hammer everyone with speed. That's the way the cookie crumbles. If hft's get advance looks and can order, cancel and fill before everyone else does though, somebody aught to be in jail.
It is well known that Vanguard's management team is in support of hft. It is equally well known that most execution traders for buy side funds, including Vanguard, disagree and directly contradict such view and see a lot of problems with hft. I would argue that execution traders are the ones that have a lot more insight into the cost associated with a fragmented market and front running orders at other exchanges than a CEO or CIO who mostly engage in politics and have certain motivations in voicing their opinions. Even Vanguard's CEO and CIO admit they cannot even define hft (its hard to make a case for or against something when you cannot even define what you are talking about). Further they admit that there are rogue players in the hft market. Furthermore, why would a firm say they are in favor of hft but then invest hundreds of millions to create their own hft algorithms to "keep pace" with market developments, unless such developments hurt them? Seems pretty contradictory if not outright hypocritical to me. http://www.investmentnews.com/artic...guard-schwab-take-different-approaches-to-hft http://www.bloomberg.com/news/artic...says-minority-of-high-speed-traders-may-abuse Additionally Brennan himself has never been an execution trader (https://www.linkedin.com/in/joe-brennan-87535015) and admitted he never even read and hence never understood the arguments against hft and I quote ("Main Street is the great beneficiary," said Bogle, while acknowledging that he hasn't read Lewis's latest book. "We are better off with high-frequency trading than we are without it.") Sounds pretty fuxxing uninformed in my book, whatever his motivation may be to support hft. Fact remains that most execution traders for large buy side and index tracking funds seem to have lots of issues with hft and expressed strong interest in becoming members at IEX from August 2016.