Please explain why small improvements in the spread are relevant compared to intraday movements. If I were trading a million shares over 10 days, then I would be much more worried about trading them at the right time of day, rather than worrying about bid/ask spreads.
Edit: I am assuming here that we are talking about trades that actually change my long-term position. That is, I am selling or buying those million shares for good because I am re-weighting my portfolio or something like that.
They are both relevant. In general a portfolio manager + investment analysts are worried about stock price movements but the trader for the fund is worried about liquidity spreads and about buying the shares for the lowest price while selling shares for the greatest price.
While $6M in not large by percentage, there is no reason to want to give that up.
While $6M in not large by percentage, there is no reason to want to give that up.
On the other hand, imagine a world of only portfolio managers and no HFT. That is, trades happen only between portfolio managers with no middle man.
Then yes, on one day you as a portfolio manager would have to give up $6M. But where do those $6M go? Logically, they must go to another portfolio manager. By symmetry of portfolio managers, it follows that on other days, you will be the one who gains $6M. That should net out to zero on average, at least assuming that all portfolio managers are equally sophisticated.
On the other hand, the HFTs earn money, otherwise they wouldn't be in the business. Where does that money come from, if not from the portfolio managers?
So it seems that as long as you're looking at a narrow micro perspective, the story makes sense. But once you add up everything to a macro perspective, the argument vanishes.
This does not necessarily apply against algorithmic trading in general. Algorithmic trading may well serve to always have some orders in the order book even on low volume markets, since humans just cannot trade on as many markets simultaneously as a computer can. But the arms race to ever lower latencies just seems useless from the point of view of society.
HFTs will not net positive out over the long term so they are not taking away from other investors. (this is based on what I said in another comment above).
Mutual funds trade huge volume and need liquidity to take advantage of market research. Without liquidity their size would require them to stay smaller and require more investment professionals for any dollar amount they have under management. Without liquidity you would see smaller and smaller mutual funds as their capacity got capped which would lead to higher expense structures for investors.
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As far as the arms race, I agree with you.
But the arms race to ever lower latencies just seems useless from the point of view of society.
5 years ago it made sense and helped investors, now or at some point in the future the market will reach the point of dimishing returns from incremental small gains in hardware. At the same time HFTs will be investing more in hardware than they will be netting out of the system. Soon, if not already the HFT business will be mature and they will net negative and become consolidated. At that point (if it hasn't happened already) HFTs will have benefited the market with additional liquidity but any profitability long term will be negative.
Edit: I am assuming here that we are talking about trades that actually change my long-term position. That is, I am selling or buying those million shares for good because I am re-weighting my portfolio or something like that.