All of you HFT programmers almost had me with the "we minimize the spread" arguments. But a $0.01 spread x 1000 transactions per second is still $10/sec while a $10 spread on a transaction that happens once a day is a hell of a lot less.
I think you're confused by what "spread" means. It doesn't mean that for every transaction, we're getting a cut of investor money. Think of it this way.
Say MSFT bid is $99.50 and ask is $100.50. That means you can sell for $99.50 and buy for $100.50. What market makers do is tighten that spread so it becomes $99.75 and $100.25, for example. Now in the first situation, if you wanted to buy 100 shares you would have paid $100.50 per share + broker fees. Let's say broker fees are zero. You just paid $10050. In the second case, you would have paid $10025, saving you 25 dollars. Note that broker fees are the same in both cases.
In reality, the MSFT spread is much tighter thanks to fast market makers, so you would probably pay $100.02 per share, so you would actually save closer to $50 on that transaction. Intense competition among different market makers makes it so that every stock has as tight a spread as possible. Think of any business that's competing with price -- offer products at too high a price and your competition will sell for less, adding value to investors and taking profits for themselves.
I read somewhere that before the great recession, there was a year when the financial sector was 40% of GDP. One way or another, you're skimming a huge and undeserved (as the great recession proves beyond a shadow of a doubt) amount of money off the top.
The keys is to the lies you tell yourself is this:
That finance in general has such a large percentage of GDP is unfortunate. But you're getting off-topic. If you're attacking the entire financial industry, I have no responses for you. Banks, hedge funds, etc. etc. I don't associate myself with all of them. My main point is that high-frequency trading is a technology, and it can be used for good and bad. Example of a good is tighter spreads, which I explained above.
> Trading is a zero-sum game.
Zero-sum games don't, by definition, contribute to the greater good, and no civilized person would ever play one for any serious stakes. If you do, you've either got a gambling problem or you've figured out your opponent's tell and you've unscrupulous enough to use that knowledge to take advantage of him.
Trading should NOT be a zero sum game. It should involve 4 parties: sellers, buyers, workers and consumers. Sellers are people who need cash to buy something else, like a house or retirement. Buyers are people who have more money than then need to spend right now. Workers are people who produce goods and services for wages. Consumers are the people who benefit from what's produced. That's not a zero sum game. In that game, everyone is a winner. It's honest, hard-working people who produce, consume, save and invest to benefit both themselves and their neighbors.
As stated earlier (see the post about wheat and bread), no one in the non-zero-sum economy needs anything traded at the ms or ns level. Once an hour or even once a day is more than frequent enough. And if that means liquidity goes down, that's fine. The only one who needs that much liquidity are the gamblers.
I should have been clearer. By zero-sum, I didn't mean that someone always gets screwed. I meant that someone always loses money, someone always wins money. But they can both win at life. You are very familiar with this. You buy food. You lose money. But you gain calories. The store earns money. Both players win, but the sum of money exchanged is zero sum. That is what I meant. If you actually read beyond my comment to the lines below, you would have understood it as such.
The concept is not so esoteric as you make it out to be. In every trade, someone loses money and someone makes money. However, they can both win. Absolutely. It's like generalized insurance. You give up money to protect... your risk, your crude oil exposure, your stock exposure, inflation... It's not like the "market" is this evil construct where common sense no longer applies. You buy something and lose money in exchange for other factors you end up gaining. And it's not like anyone is forcing you to trade. Just as you don't have to buy at a certain store, you don't have to trade certain products.
You mentioned something about trading once a day. That's actually not unreasonable, and I have arguments to support and refute the suggestion. That's a separate topic though.
If I'm buying stock, it's because I think it will pay a good dividend and it's value will increase over time. It will be years, not nanoseconds, before I sell it. And if you trick me into buying a bad stock that I know nothing about because, hey, it's only $0.01/share, you can always just sell it again, then shame on me for gambling and shame on you for deception.
Again, I think you mistake what the stock market is doing. When you decide to buy a stock, you're not looking at instantaneous price actions. You're probably listening to your brokers, who has much more information about your habits than the market, and as a result has much of a better chance at manipulating you than the market ever will. No trading firm is going to force you to trade. You can buy a stock and sell it four years later. That's fine. High-frequency market makers provide (as explained above) tighter spreads so that you can save $50 on that MSFT transaction when you enter and exit.
And if less frequent transactions means the spread goes up, that's fine too. Because instead of paying someone thousands and thousands of pennies on thousands and thousands of transactions, I'm paying an honest stock broker a few bucks on a few transactions. And I'm getting a service in exchange for that price. I expect my broker is watching out for me. I expect he's a smart guy who knows useful things about the markets that I don't know. I expect he's researched the stocks he's recommending and I expect he'll keep track of them and call me with a sell recommendation if the company's management takes actions he find questionable.
You don't pay "thousands of pennies" on thousands of transactions. Please refer to my first point. When the spread gets tighter, the exact opposite happens -- you actually save thousands of pennies. Your broker actually may have an incentive to cheat you out of your money because he probably gets incentives for trading on certain exchanges. You see, exchanges are also a business, and the more flow they can command, the more they make. They might pay brokers a kickback in exchange for flow, and you may never know about it. My point is that brokers are not intrinsically more ethical than traders out on the market. Good brokers won't cheat you. Good market makers won't manipulate the market. Fast traders are not intrinsically evil.
But those type of brokers (if they even exist anymore) now have to contend not just with the fundamentals of an investment, but with the large ups and downs cause by the gambling that HFT allows. That can't give sound advice because they can't possibly predict the randomness you introduce into prices.
Don't get me wrong. As a geek, I'm in awe of your abilities. I have no doubt you're smarter than me. I have no doubt that you can program faster and better than me. And I envy those abilities envy. But don't tell me (or yourself) that anything you do is in any way good for the markets or for society. It's not. You're a bookmaker plain and simple. You're like the clerics who argue over how many angles can dance on a pinhead, siting in an ivory tower, gorging yourself on the best food and wine paid for by tribute extracted from the unwashed masses by lies, manipulation and even brutality. You consume a lot. You contribute nothing. And eventually the rest of us will have to get out the torches and pitchforks and come after you.
I will ignore your sensationalist rhetoric. I've talked to brokers and liquidity removers. They're much happier that the execution slippages are so low nowadays, thanks to tight spreads. You can read about many public fund institutions that serve long term investors and how they rave about how easy and cheap it is to buy and sell stock, and as a result, charge investors like yourself less to invest in your 401k.
A market maker adds value to the markets through tighter spreads and continuous availability. You cannot deny this. Designated market makers go all the way back to the early days of floor trading. The only difference now is that everything has become electronic. Now, are there people unfairly utilizing their knowledge of technology to disrupt the market? Yes. Are there people manipulating price action to fool other traders? Yes. I cannot deny that. But that's my main point -- electronic trading is a technology. It can be used for good and bad. You cannot deny the function that market makers bring to the marketplace. What you can debate about is how technology is being used incorrectly and how it should be regulated. I agree on that point. Cars kill people; but they add the value of transportation to society. So we learned to regulate it and live with the casualties.