This morning Tyler Cowen wrote again about High Frequency Trading. His post has to do with the idea that our economic intuition breaks down at small scales.
I don’t think small scale is the matter; I think transparency is. Middlemen have been loathed for a long time, even though they provide a useful function. But the more apparent their profit the more we feel cheated, as if they exploited us. Somehow it feels like they gained unfairly.
Grocery store cash register receipts often list the amount you “saved.” Imagine how you would feel about the stores if they instead listed the amount you paid over the grocer’s cost.
Consider why you don’t feel cheated when you shop at your favorite big box store – Costco, Target, or Walmart. Chances are not only do you not feel cheated, you feel you got a bargain and you might even spend more than you intended. You know the store makes a profit by marking up inventory over cost, but it’s not apparent to you.
Compare that to watching your stock orders get filled. You see the price dip temporarily, just prior to your sell order getting executed, or you see the price tick up temporarily, just prior to your buy order getting filled. You get filled and then the price reverts. You feel chiseled.
Don’t.
I put the loathing down to the fact that you can witness the price behavior in real time.
Back before we had HFTs, there were actual humans on the other sides of those trades. Because they didn’t trade as rapidly and because they made more mistakes, they had to charge bigger spreads. The commissions were bigger too. So the cost of collapsed commissions and more efficient market makers is you have the opportunity to witness yourself getting fleeced, instead of paying a lot more and witnessing nothing.
But nobody’s making you look – so get over it!