Does automated trading generate any real profit?
Reposting of an important question from a forum, because I think it’s a pretty important question.
Does automated trading generate any real profit? What I’m trying to ask is that if we have two identical country, and then add an automated trading system to one of them. Will that country end up having more wealth than the other after some time?
In contrast to Chris Stuccio in his apologia, I would expect high frequency trading to be net socially beneficial in theory. Automated traders, including high frequency traders, are middlemen. According to classical economic theory, this would mean that the exchanges occur more frequently, and the market’s price discovery mechanism is more accurate as a side effect.
An example of this beneficial effect of middlemen would be many post-soviet economies.
The centrally planned system didn’t work, causing massive distortions in both quantity available and prices of many goods, services, and currencies. Once the country moved to a market system, within months, there was food on every store shelf at roughly equivalent prices, because middlemen were competing with one another. They earned significant profits, but also everyone else benefitted from having a price system that truly reflected opportunity costs.
The most dramatic example of this was the Ukraine, which has some of the highest quality soil in Europe. Under communist central planning, there was mass hunger and no food on the shelves, and food rotting the fields. Once a free market system was introduced, everyone was happy and better off. Farmers sold food. Middlemen delivered it to stores. Consumers were able to buy food.
Wealth, for society as a whole, is generated by multiple transactions (i.e. buy here, sell there for a higher price), and it results from successful forecasting, and satisfying actual demand.
Also worth noting, is that high frequency trading firms profits have been going down, probably due to increasing competition.
- Farmers to get relief from middlemen (thehindu.com)
- Chris Stuccio, A High Frequency Trader’s Apology, Pt 1 and Pt 2
- Dark Pools: the real dangers of hurting the middleman
- High-Speed Trading No Longer Hurtling Forward: The NYT discloses that HFT is now cooling down?!?