"Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc."
There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.
Manning rule dictates that retail orders held by a market maker must be filled before any other orders (or equally that fills must be given to the retail order), brokers don't look kindly on firms that reject customer orders with any regularity, and anyways retail flow on a volatile+wide spread symbol are loved by market makers.
I don't know if this is true, but higher liquidity and lower spreads reduces the cost of every trade, which is money in the pockets of retail and value investors. I assume this is why Vanguard says HFT has been helpful for them (despite the fact that they don't do HFT themselves).
Aren't the cost of the trade and price of the trade two different things? Tighter spreads can only do so much to offset disadvantageous pricing, right?
No, you cant. The spread is the difference between the bid and the ask. You can't have disadvantageous pricing without affecting the ask. Which would in term drive up the spread.
People believe all sorts of weird things, but the actual offense of front-running involves an agency relation: it occurs when you work with a broker/dealer to order your securities, and upon receiving your order, they trade for their own account ahead of yours.
I don't know if "esoteric" is the word. You're saying, lots of people seem to believe that the advantage fast electronic market making has over "conventional" trading is a form of front-running.
That is true. But: it is not.
Lots of people also believe that high-end market research (for instance, targeted research and maybe even electronic surveillance about how many widgets a company has sold) is a form of insider trading. But: it is not, even though lots of people say that, and for the same reason.
In both cases, people believe there is something shady about people going to extraordinary lengths to obtain a trading advantage. And, in both cases, not only is the market resilient to those efforts to gain advantage, but the markets are theoretically improved by them. The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price for something, and to make it efficient for people to buy and sell at that price.
I am aware that people believing a thing doesn't make it true.
I am also aware of the arguments in favor of HFT. As you stated, the oft-made claim that the market is improved is theoretical as well; hence, is also a product of "belief".
It's not a settled question. [0]
>The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price
The improvement I'm talking about is objective: in the former case, by competing down spreads and minimizing the cost to execute any given trade, and in both by expediting price discovery.
You can disagree that these are things worth optimizing (though if you weren't careful you'd risk arguing in some sense against the premise of a market), but it's less clear to me how you'd argue that the causality is other than what my argument says it is.
How does that question even make sense? By definition, the spread is a tax investors --- including small investors --- pay to buy or sell a holding. In what way could they possibly benefit from wider spreads?
Regarding Flash Boys: I don't know of a single person who works in trading who has stuck up for that book. I strongly recommend "Flash Boys: Not So Fast", which debunks it but is also much more interesting from a technical perspective than Lewis's book.
Yeah and the old DMM's used to stub quote when things got rough. Same shit, different day. Under most environments, HFT has been a net positive particularly in the single name options market. Pretty much every name out there is quoted with decent depth because an algo can now quote a few vols either side and make decent coin given that it costs nothing to stay laid up these days.
There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.