How high frequency trading works
HFT made spreads far narrower and markets far faster. Both of those facts are consequences of the same thing.
Understand who you are actually trading against.
How high frequency trading works works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The fee you never see
You buy at the ask and sell at the bid, so you are down the spread the instant you trade. In an illiquid stock it dwarfs any commission you thought you were avoiding.
- 1
The edge is speed, not insight
These firms have no view on whether a company is any good. They are trying to be a few microseconds faster at reacting to a price change than everyone else, and they will pay enormous sums for a shorter cable to achieve it.
- 2
Much of it is just very fast market making
Quoting both sides, capturing the spread, thousands of times a second, holding almost nothing overnight. This competition is a large part of why spreads have collapsed and why retail trading is now nearly free.
- 3
Some of it is less benign
Strategies that detect a large order arriving and trade ahead of it extract value from the institution placing that order, which is ultimately a pension fund, which is ultimately you. This is the part of the debate that is not settled.
The liquidity HFT provides has a habit of disappearing in exactly the moments it is most needed, because nothing obliges the firms to keep quoting during a crash.
- 4
It does not affect your holding period at all
If you are buying a business for five years, a firm competing over microseconds is not your competitor. It is, at worst, a very small tax on your entry, and at best the reason your entry was cheap.
You can argue both sides of whether HFT helps ordinary investors.
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HFT made spreads far narrower and markets far faster. Both of those facts are consequences of the same thing.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.