What benefit does short-term trading serve for society?
All I've heard is that the markets become more efficient and that people can now buy/sell assets at the correct price at the moment of the trade. Please enlighten me. Thank you.
It adds a meaningful amount of liquidity.
But it doesn’t have to provide any benefit for it to be allowed to exist, since it is a zero sum game
There is definitely a baseline benefit. In terms of joining the industry today, can a case be made?
It provides liquidity. That's pretty much it. Yes, I can be a trader that does aggressive execution but regardless, it still provides liquidity because SOMEONE has to hit the bid or lift the offer to move the market...
No liquidity = Dead Market
liquidity
Liquidity is not enough for you uh?
The market will always be improving in terms of efficiency, but there are simply diminishing returns in terms of how much society cares about having a liquid market vs. a slightly more liquid market?
If your question is - will the markets benefit by having one more trader? The answer is no.
You can always trade on behalf of clients. Managing other peoples money has value.
without short term trading, bid/ask spreads would be very wide...because by definition, very few limit orders for trading would exist for any security.
For many securities, there would be no market at all...and no way for the average investor to have a clue what the current price is for a stock or bond.
However, there is a limit to the benefit of short term trading. ultra high frequency trading, where algos try to step in front of orders and front run them..not looking to take any risk, just looking to arb the latency between exchanges and the laziness of certain retail brokers that don't look for best execution with advanced order types....this type of short term HFT trading does not benefit society in any way...it is a tax on society, and should be stamped out. The speedbump for example helps remove this.
Agree with what you said here regarding HFT.
When I started in trading, 90% of futures volumes in the S&P 500 contracts was in open outcry .. the CME had just started messing around with Globex, but the markets were too thin. But it is ironic now for me to hear people complain about high frequency traders and how they are ripping people off ..
20 years ago it was "all those scumbag locals at the Merc" who were ripping people off.
So things change, but not really
I guess it depends on whose society you're talking about
It creates young wealthy people, thereby ensuring the health of luxury brands.
It rigs the game because the high-velocity traders have insanely fast internet connections (and the resulting instantaneous data feeds) that allow them to front-run retail traders and skim risk-free arb off the efficiency delta. This is why day-trading is a fool's errand for 99.9% of individuals - instead, the way to win as an individual market participant is patient long-term investing.
Efficient markets exist only in the mind of academics that get raped whenever they tried trading in real markets. Forget about it.
HFT firms love the concept because it's good PR for them.
Liquidity is probably the biggest benefit to existing shareholders and new investors. The fact that a company trades on a daily basis (with significant volume) is a huge value add, and inarguably is the biggest draw for a company going public.
Being public also benefits shareholders as it provides the company access to new sources of capital, allowing a company various fundraising options - (oftentimes generated from new debt or equity issuance).
Publicly traded companies can also benefit from fluctuations in public demand for the stock (although I look at this as a double-edged sword as price can equally rise or fall significantly based upon public perception).
**All of these "benefits" are inarguably aided by the fact that there is an active and highly liquid market in a particular stock, which is no doubt tied to the active exchanging of shares (whether it be done day traders, market makers, or other investors)
If I had a penny for every genius that shits on HFT because they read flash boys.
idiots.
I bid municipal transactions competitively so I can give you some decent insight. Say town of bumfuck nowhere wants to issue some bonds to build a school by bonding property taxes, they’ll put their debt out on market and dealers will bid for it. More dealers = better bid, thus the TOWN will get a new school building as cheaply as possible. Less dealers = worse bid, less proceeds, and more interest all at the expense of the tax payer. So in this case the value of one added seat pays dividends for the market.
Why do you think prices react to new information?
who do you think buys a stock after an m&a announcement occurs so that the correct value is reflected?
just curious who you think that entity is. Do you think it is long term investors that create short term price reactions like this?
if you think it is long term investment funds, then would also like to know what year you are in in high school / college - would be helpful context
The short answer: Absolutely none whatsoever.
People don't get into this business in order to help society, they do it to make money for themselves.
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