Why is spoofing illegal?

HFT doesn't make the market less fair. If anything it improves overall fairness. I'd normally assume you have a clue about this stuff given the sub we're in but since you're asking a question like this I'm going to keep this as simple as I can.

HFT players get market data and respond to it in a fraction of a second (obviously much faster than the average investor). How much does the price of a stock like Apple move in a fraction of a second? A few cents. So, when you see a security is trading at some price and you submit your market order, you may get it for a little more (or possibly less) depending on how much (and in which direction) the market is moving.

I know what you're thinking: how is it fair that those greedy HFT firms get to "rob" you of a few cents every time you trade? The answer is that they are providing a service: they will always take the other side of your trade. Think about that for a minute. It's a simple but important concept: a trade can't happen if there isn't someone on the other side of it. HFT firms are always there to take the other side of your trade.

The bottom line is that HFT shops are middlemen. They are like car dealerships and farmers markets. They are providing a service, plain and simple. You don't pay them directly for the service they provide, instead the people that run the markets give them incentives to provide this service. Their presence increases liquidity (the ease and speed at which trades occur) and decrease spreads (the difference in price for buying/selling a security at any point in time).

One final point. During this discussion I've been implicitly talking about market orders, which means you want to trade immediately at whatever price the market is at. There are also limit orders where you set the worst price you're willing to pay. If you saw Apple trading at $122.25 and you don't want to pay one cent more than that, then just submit a limit order at that price. You may get it for that price exactly, or even a better price (or it may not execute at all if the market moves away from that price) but you are guaranteed not to pay more than the price you specified.

/r/algotrading Thread Parent