High frequency trading is a candidate for a sector of finance that makes money through buying and selling stocks a little bit faster than others, without contributing much social value.
I think that this is a bit of a misunderstanding of what HFT does. A lot of HFT firms spend significant resources trying to be fast, but they do that because a lot of other HFT firms are also spending significant resources to be fast, and are pursuing very similar strategies. Speed is all about competing with the other trading firms, not about being quicker than end users. The strategies that HFTs are pursuing are socially valuable (typically, market-making and/or arbitrage), and they are competing along multiple dimensions, not just speed. Speed typically doesn’t become important for a given strategy until competition has forced profitability per trade down to a minimal level. Once the bid-ask spread cannot get any tighter, then speed becomes an important factor but not until then and getting those spreads down is clearly valuable to end users. The pursuit of speed is “wasteful” in that it is costly and the end users don’t really care about it, but the costs have to be born by the trading firms themselves. They can’t pass those costs onto end users by increasing spreads because price priority beats time priority. The firm that tries to be super fast but at noncompetitive prices just won’t trade.
I think that this is a bit of a misunderstanding of what HFT does. A lot of HFT firms spend significant resources trying to be fast, but they do that because a lot of other HFT firms are also spending significant resources to be fast, and are pursuing very similar strategies. Speed is all about competing with the other trading firms, not about being quicker than end users. The strategies that HFTs are pursuing are socially valuable (typically, market-making and/or arbitrage), and they are competing along multiple dimensions, not just speed. Speed typically doesn’t become important for a given strategy until competition has forced profitability per trade down to a minimal level. Once the bid-ask spread cannot get any tighter, then speed becomes an important factor but not until then and getting those spreads down is clearly valuable to end users. The pursuit of speed is “wasteful” in that it is costly and the end users don’t really care about it, but the costs have to be born by the trading firms themselves. They can’t pass those costs onto end users by increasing spreads because price priority beats time priority. The firm that tries to be super fast but at noncompetitive prices just won’t trade.
Thanks! I don’t have subject matter knowledge here, so this is helpful.