Does high frequency trading provide economic value?
"This is a very important question and you will find arguments from both sides, in part because it is still understudied. Ben Golub, Economics Ph.D., from Stanford answers ""Is high-frequency trading good for the economy?"" on Quoram quite well.  This is an important but understudied question. There are few   published academic studies on it, though several groups are working on   the subject. You may be interested in the following papers: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1569067 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1361184 These document some of the phenomena that arise in high frequency   trading, from a theoretical and an empirical perspective. However, a   full equilibrium analysis of the unique features of high frequency   trading is still missing, and until it is done, all our answers will   be kind of  tentative. Nevertheless, there are some obvious things one can say. Currently,   high frequency traders are competing to locate physically closer and   closer to exchanges, because milliseconds matter. Thus, large amounts   of money are being spent to beat other market makers by tiny fractions   of a second. Once many firms make these investments, the market looks   like it did before in terms of competition and prices, but is a tiny   bit faster. This investment is unlikely to be socially efficient: that   is, the users of  the market don't actually benefit from the fact that   their trades are executed half a millisecond faster -- certainly not   enough to cover all the investment that went into making that happen. Some people who study the issue believe that high frequency trading   (HFT) actually exacerbates market volatility; some plots to this   effect are found in the second paper linked above. There is certainly   no widely accepted theory that says faster trading technology   necessarily increases efficiency, and it is easy to think of   algorithms that can make money (at least in the short run) but hurt   most other investors, as well as the informational value of the   market. One caution is that some of the complaining about HFT comes from those   who lose when HFT gets better -- old-style market makers. They   certainly have an incentive to make HFT out to be very bad. So some   complaints about the predatory nature of HFT should be taken with a   grain of salt. There is no strong economic consensus about the value   of this activity. For what it's worth, my personal impression is that   this is more bad than good. I'll post an update here as more   definitive research comes out. You can also find a debate on High-frequency trading from the Economist which gives both sides of the argument. In conclusion: Regardless of how you feel about HFT it seems like it's here to stay and won't be leaving in the foreseeable future. So the debate will rage on... Additional resource you may finding interesting: Europe Begins Push To Ban HFT High Frequency Trading Discussion On CNBC Should High Frequency Trading (HFT) be banned ?" You pointed out that HFT does not create ipods are mine minerals.  Neither does human trading. HFT is a proxy for human trading.  Although the computer is executing trades automatically based on an algorithm, it is still using money from a human being's account so the trading is still being done with someone's money. Fast execution of trades is desirable in exchanges.  Imagine two exchanges:  One only executes trades once a month, the other executes trades once a week.  Which exchange would be more desirable?  The exchange that trades once a week.  Why?  Because if I'm holding a stock that I would like to sell, I want to sell it now - not a month from now.  Same reason for buying.  This concept works all the way down to seconds and fractions of seconds. The issue with HFT, however, is there are cases where the market goes against the HFT algorithm and the algorithm continues to execute trades driving prices up or down by large amounts in the matter of minutes or even seconds. The exchange frequently cancels these trades which only encourages more aggressive HFT trading since HFT traders can have their losses cancelled.  This is a privilege that LFTs (low frequency traders) do not receive.  This is a valid criticism of HFTs. A short list of such cancelled trades: 8/26/2010: Nasdaq cancels trades of CORE stock 10/4/2010: Nasdaq cancels trades of CENX stock 10/15/2010: NYSE cancels trades of PAY stock 10/18/2010: NYSE cancels $500 million worth of SPY trades 5/18/2011: NYSE cancels 15,900 trades of BEE.PR.C 6/21/2011: Nasdaq cancels CNTY trades 12/2/2011: London Metals Exchange cancel trades of copper
"Not really. High frequency traders affect mainly short term investors. If everyone invested long-term and traded infrequently, there would be no high frequency trading. For a long term investor, you by at X, hold for several years, and sell at Y. At worst, high frequency trading may affect ""X"" and ""Y"" by a few pennies (and the changes may cancel out). For a long term trader that doesn't amount to a ""hill of beans"" It is other frequent traders that will feel the loss of those ""pennies.""" I should also add that the 7/63 won't do much for you. If you're really interested in finance, you have a few options.  1) Sales - in which case the 7/63 is about all you need. The rest is just time and practice.  2) A job as an analyst. Your best bet here is to pursue the CFA charter.   3) A financial planner/advisor. This job is kind of a subcategory of #1. I always like to say that an advisor's primary job is to sell, giving meaningful advice is secondary. Nonetheless, a CFP is helpful here.  4) A trader. CFA charter is helpful here as with #2.  5) High Frequency Trading - Masters/PhD in math or a quant discipline and C++ is a must. Yes.  if it wasn't rigged before, it certainly is now.  High frequency trading and the ability to buy priority access to the exchange are the one two blows that killed it.  Honestly, the exchanges themselves should be network neutral.  It's an absolute crime that they aren't, it just takes money from normal people. "To Many question and they are all treated differently. I was wondering how the logistics of interest and dividend payments are handled on assets , such as mortgages, bonds, stocks,   What if the owner is some high-frequency algorithm that buys and sells bonds and stocks in fractions of a second? When the company decides to pay dividends, does it literally track   down every single owner of that stock and deposit x cents per share in   that person's bank account? (This sounds absolutely absurd and seems   like it would be a logistical nightmare). In Stocks, the dividends are issued periodically. The dividend date is declared well in advance. As on end of the day on Dividend date, the list of individuals [or entities] who own the stock is available with the Stock-Exchange / Registrar of the companies. To this list the dividends are credited in next few days / weeks via banking channel. Most of this is automated. What if the owner is some high-frequency algorithm that buys and sells bonds and stocks in fractions of a second? On bonds, things work slightly differently. An Bond is initially issued for say 95 [discount of 5%] and payment of 100 after say 5 years. So when the person sells it after an year, he would logically look to get a price of 96. Of course there are other factors that could fetch him a price of 94.50 or 95.50. So every change in ownership factors in the logical rate of interest. The person who submits in on maturity gets 100.  For the homeowner, I'm assuming he / she still makes mortgage payments to the initial bank they got the mortgage from, even if the bank no longer ""owns"" the mortgage. In this case, does the trader on the secondary market who owns the mortgage also come back to that bank to collect his interest payment? This depends on how the original financial institution sells the mortgage to new institutions. Generally the homeowner would keep paying initial financial institution and they would then take a margin and pay the secondary investor. If this was collateral-ized as Mortgage backed security, it is a very different story." The stock market's principal justification is matching investors with investment opportunities.  That's only reasonably feasible with long-term investments.  High frequency traders are not interested in investments, they are interested in buying cheap and selling expensive.  Holding reasonably robust shares for longer binds their capital which is one reason the faster-paced business of dealing with options is popular instead.  So their main manner of operation is leeching off actually occuring investments by letting the investors pay more than the recipients of the investments receive. By now, the majority of stock market business is indirect and tries guessing where the money goes rather than where the business goes. For one thing, this leads to the stock market's evaluations being largely inflated over the actual underlying committed deals happening.  And as the commitment to an investment becomes rare, the market becomes more volatile and instable: it's money running in circles. Fast trading is about running in front of where the money goes, anticipating the market.  But if there is no actual market to anticipate, only people running before the imagination of other people running before money, the net payout converges to zero as the ratio of serious actual investments in tangible targets declines. By and large, high frequency trading converges to a Ponzi scheme, and you try being among the winners of such a scheme.  But there are a whole lot of people competing here, and essentially the net payoff is close to zero due to the large volumes in circulation as opposed to what ends up in actual tangible investments. It's a completely different game with different rules riding on the original idea of a stock market.  So you have to figure out what your money should be doing according to your plans. Big money, by vitue of its own existence, produces value.  What's a person to do with it? Stuff it under a mattress and earn 0 yield? No.  If you want safety, you'll put it in AAA rated US gov't bonds and help fund the government. If you want yield, you'll put it in broadly diversified equities investments, small companies, big companies, energy companies, tech companies, media companies, and so on, and soak up the net gain while injecting much needed capital investment directly into those industries, financing start up costs like construction and equipment procurement costs, as well as staffing costs.  Yes, big money absolutely creates value. The trains, cars, roads, and sidewalks you travel through to get to work? All financed by filthy rich people money. The building you work in and the equipment you use? Likely financed by filthy rich people money as well.  Its called financial intermediation and capital arbitrage, and you can thank your Gods you live in a country where the government allows it to operate efficiently. "Yes, of course there have been studies on this.  This is no more than a question about whether the options are properly priced. (If properly priced, then your strategy will not make money on average before transaction costs and will lose once transaction costs are included.  If you could make money using your strategy, on average, then the market should - and generally will - make an adjustment in the option price to compensate.) The most famous studies on this were conducted by Black and Scholes and then by Merton. This work won the Nobel Prize in 1995. Although the Black-Scholes (or Black-Scholes-Merton) equation is so well known now that people may forget it, they didn't just sit down one day and write and equation that they thought was cool. They actually derived the equation based on market factors. Beyond this ""pioneering"" work, you've got at least two branches of study.  Academics have continued to study option pricing, including but not limited to revisions to the original Black-Scholes model, and hedge funds / large trading house have ""quants"" looking at this stuff all of the time.  The former, you could look up if you want. The latter will never see the light of day because it's proprietary. If you want specific references, I think that any textbook for a quantitative finance class would be a fine place to start.  I wouldn't be surprised if you actually find your strategy as part of a homework problem. This is not to say, by the way, that I don't think you can make money with this type of trade, but your strategy will need to include more information than you've outlined here.  Choosing which information and getting your hands on it in a timely manner will be the key." You can look at it from a fundamental perspective to see who benefits from rising oil prices. That's a high level analysis and the devil is in the details - higher oil prices may favour electric car producers for example or discount clothes retailers vs. branded clothes manufacturers. Another approach it to use a statistical analysis. I have run a quick and dirty correlation of the various S&P sector indices against the oil prices (Crude). Based on the the results below, you would conclude that materials and energy stocks should perform well with rising oil prices. There again, it is a behaviour you would expect at the group level but it may not translate to each individual company within those groups (in particular in the materials sector where some would benefit and some would be detrimentally affected). You could get exposure to those sectors using ETFs, such as XLB and XLE in the US. Or you could run the same analysis for each stock within the S&P 500 (or whatever index you are looking at) and create a portfolio with the stocks that are the most correlated with oil prices. This is calculated over 10 years of monthly returns after removing the market component from the individual sectors. The two important columns are: