Question

how has high frequency trading firms and market makers such as citadel improved the overall stock market efficiency in terms of order execution and liquidity? Also, do the ethical concerns such as using predatory trading strategies outweigh the benifits of the efficiency that these firms have created, or is it just a small price to pay for their "service"?

Answer 1

The high frequency trading firms and market makers have definitely improved the overall order execution process and enhanced liquidity in the market. The market makers are available on the both side of the market bid and ask to provide liquidity. By doing this market makers have also reduced the spread, difference between bid and ask. In most high volume securities the spread is one cents. The order execution process, because of the nature of HFT firms and their requirements has improved significantly. Order in terms of routing has become better, the order is routed to more favorable exchange or ECN and is executed more swiftly. So yes, in some ways HFT firms and market makers have definitely enahanced the liquidity and order execution process.

These benefits have not come with without the cost. The trading done by HFT firms in many ways is close to impssible for a retail investor to understand. The HFT uses complex trading strategies and quantifying the data in model and sending the order through algorithms. Most of the high frequency trading firms use algorithms to trade and the process is completely automated. To make sure that their orders reach faster to the exchange, they relocated their fascilities closer to the exchange, which is not viable for a retail trader to do so. The trading strategies used by the HFT are so complex that sometimes it backfires at them like the case of Knight capital. The HFT firms does not just have far more edge than a retail trader but their complex strategies can sometimes create havoc for the regulators to manage. In some way the ethical concern and negative Impact brought in by these firms have outweigh the benefits brought in by them but there is no quick solution to that also. Regulators can't put simply ban on them.