> "...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion.
I believe it's technically an observation, a claim that in the writer's experience, bullshitters fall back on that argument. It's true that he didn't explicitly give evidence for that, but expecting writers to justify every single statement in a short piece that is one of many they write on a topic is another refuge of bullshitters. He's right, though. Bullshitters use that claim because it's a vague, hard-to-verify positive claim that can be made about almost any market activity.
He does support the implied assertion that the claim is bullshit in this case. The only reason we care about liquidity is that you want people the market serves to be able to execute productive trades more quickly and cheaply. If it hasn't gotten cheaper, that's good evidence that HFT trading is not socially useful.
You interestingly also provide evidence that the claim is bullshit. In the article you link, it mentions that the most profitable HFTs aren't liquidity-generating; they are liquidity-taking. That is, they aren't coming into the market with open orders that sit their waiting for other people to take them. They are coming in with orders that match existing offers, removing liquidity from the market. That's from an academic study linked in your article: http://faculty.chicagobooth.edu/john.cochrane/teaching/35150...
"The only reason we care about liquidity is that you want people the market serves to be able to execute productive trades more quickly and cheaply. If it hasn't gotten cheaper, that's good evidence that HFT trading is not socially useful."
That serves as some evidence that it is not socially useful. It completely ignores "more quickly", and for the strongest argument you should also show that nothing else has happened in that time period that would have increased costs and slowed transactions but for HFT.
"the most profitable HFTs aren't liquidity-generating; they are liquidity-taking"
Sure, the easiest way to be among the most profitable HFTs is to cheat, and the way you act on early information is active orders. That doesn't mean they are the most prevalent - I was not able to find actual statistics on the number of each class (aggressive, mixed, passive) represented in the market, but the sample count for trades of aggressive firms was less half of that for the other two.
Edited to add: Actually at a slightly closer glance, it looks like they were looking only at firms that didn't lose money, which seems pretty worthless. "Active strategies have more divergent outcomes" seems a better explanation of the data then "active strategies make more money" - particularly if the reason for the lower sample count is more "active" firms lost money.
None if this is to say that I think there's nothing worth fixing in our financial system, I just want to be sure we're using the evidence we have appropriately.
On the contrary, the idea that HFT increases liquidity is pretty much obvious if you think about it. It's the assertion of the opposite that needs extraordinary proof, and since the author doesn't provide anything at all, he sounds like a bullshitter to me.
You are seriously suggesting that a professor of finance who specializes in studying high-frequency trading is just bullshitting? In a 60-page academic paper on his area of professional expertise? And your view is based on nothing other than the causal intuition of an anonymous commenter called "tutufan"? Gosh, color me convinced.
Yes, market participants on average increase liquidity. Which is why you have that intuition. But it isn't specifically true in all cases. For example, take a simple commodities market where buyers and sellers show up in person to trade wheat. Farmers show up to sell; flour-makers show up to buy. With me so far?
If I place people on the main roads into town and have them buy up all the grain before it reaches the market, I will be reducing market liquidity, because anybody who needs wheat will be totally fucked unless I decide sell to them.
I believe it's technically an observation, a claim that in the writer's experience, bullshitters fall back on that argument. It's true that he didn't explicitly give evidence for that, but expecting writers to justify every single statement in a short piece that is one of many they write on a topic is another refuge of bullshitters. He's right, though. Bullshitters use that claim because it's a vague, hard-to-verify positive claim that can be made about almost any market activity.
He does support the implied assertion that the claim is bullshit in this case. The only reason we care about liquidity is that you want people the market serves to be able to execute productive trades more quickly and cheaply. If it hasn't gotten cheaper, that's good evidence that HFT trading is not socially useful.
You interestingly also provide evidence that the claim is bullshit. In the article you link, it mentions that the most profitable HFTs aren't liquidity-generating; they are liquidity-taking. That is, they aren't coming into the market with open orders that sit their waiting for other people to take them. They are coming in with orders that match existing offers, removing liquidity from the market. That's from an academic study linked in your article: http://faculty.chicagobooth.edu/john.cochrane/teaching/35150...