I have seen the opposite of this. The edge being in receiving the spread & the obligation being only for a percentage of the day. Also, the massive trading fee discounts MMs get make it worth while. Have never seen a profitable HF strategy paying a CFD spread. And, trading on a market makers price is not a privilege .. it's a last resort.
Then it is not so bad. As long as the firm can switch off algorithms on a day when these don't work well and there is no penalty or fine is manageable, it should work. Perhaps, I didn't explain well what I meant by trading CFDs. Leading execution firms such as Goldman or UBS are usually market makers in a number of markets. Any orders an HFT firm places would be sent directly to the exchange and never executed directly via market maker (unless the firm requests it). However, all the positions opened this way will be in the name of the market maker without the beneficial interest attached. What the firm receives instead is a CFD contract with the price at which the lots was actually traded at on an exchange plus commission. So, there is no CFD spread (unlike trading via a spread-betting firm).
What you say is true. However, I stand by my comment that it is totally irresponsible to delay delivery of the stock one sold indefinitely. (I called people who do this "crooks" in my earlier post.) A trader usually has some sort of horizon for a short position. So, if the horizon is, say, 7 weeks, a responsible trader will borrow the stock for the whole 7 weeks or even for 2 months to be sure. Besides the fact that the lender can't request the stock back for the term of the repo contract, this way borrowing is usually also cheaper. Relying on rolling overnight borrowing for a long-term position is dangerously irresponsible. In the above scenario there is still a problem that you failed to mention. The lender may fail to deliver the stock on time. However, if the stock is on a hard-to-borrow list the risk of non-delivery is high anyway. So, a responsible thing to do is to wait for delivery before selling the stock. Currently in the US, non-delivery is considered pretty much a normal thing. There are lots of reasons a delivery may fail including honest mistake in the back office and another seller failing to deliver to you. So, fines are set at a relatively low level on the assumption that failing to deliver is not an offence and merely delivers inconvenience to the buyer/borrower. The consequence of these rules is when the cost of borrowing a stock exeeds the fine for non-delivery a number of market participants find it acceptable to refuse to buy back or borrow the stocks they sold and fail to deliver for weeks or months straight. The above anomaly is what the piece of legislation referred to in the opening post in this thread is looking to address...
Are margins calculated daily (eod) or intraday? I mean, for HFT, which may need a large volume of shorts intraday, do margins also spike intraday?
So effectively the HFT is on swap with their broker in this example .. with the broker holding their actual positions, and taking credit risk against the HFT, in so far as the swap obligations are concerned. Sounds expensive for the HFT in terms of txn costs, exp whatever margin the swap desk is adding on for the privilege of talking to them. The HFT MMs I am aware of are exchange members with external clearing. No broker / swap bs involved.