1

"The major benefit of HFT is it has improved market liquidity and removed bid-ask spreads that previously would have been too small." - Investopedia

"The size of the bid-ask spread from one asset to another differs mainly because of the difference in liquidity of each asset." - Investopedia

If the major benefit of HFT is improved market liquidity, and small bid-ask spreads are indicative of more liquidity, why are small bid-ask spreads removed?

  • May simply be an editing error. But when you cite from websites, please link to the source for context. – chirlu Nov 26 '17 at 23:02
1

If the major benefit of HFT is improved market liquidity, and small bid-ask spreads are indicative of more liquidity, why are small bid-ask spreads removed?

Generally the bid-ask spreads are small. HFT has removed even these small bid-ask spread ... to almost NIL or insignificant/smallest. Small is in context to zero/insignificant.

This was tested by adding fees on HFT, and as a result, bid-ask spreads increased. One study assessed how Canadian bid-ask spreads changed when the government introduced fees on HFT, and it was found that bid-ask spreads increased by 9%.

  • 1
    While it's always good to run experiments, notice how it's almost a tautology that higher trading fees cause wider spreads. If Alice believes she can profit by selling stock S only at price P or higher, and then a new transaction fee of $.0001 per trade appears, clearly she can now only profit if she sells S at price P+.0001 or higher, because she has to pay for the new fee as well. So the sell half of the spread has now gone up by at least .0001. Similar logic causes the buy half of the spread to also go up by at least .0001, and now the overall spread has gone up by .0002 (at least). – dg99 Nov 27 '17 at 21:29

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.