Trading profits were small, but the huge volumes involved led to substantial totals, according to the researchers. They calculate that winning the average race was worth about £2 ($2.75), and that HFT races accounted for more than 20 percent of the volume on the London Stock Exchange.
HFT races accounted for about a third of the bid-ask spread, the researchers find. That spread between the price buyers are offering for a stock and what sellers are asking is a key measure of the cost of transacting in the market, thus races effectively impose a tax on investors, the researchers argue.
If markets were to be designed in a way that eliminated the negative aspects of HFT, investors could save 17 percent of their liquidity costs on each trade, the researchers find. That savings might not amount to much for individual investors, but it would add up to a significant trading cost for pension funds, investments funds, and other large investors, according to the researchers.
“Flawed market design drives a significant fraction of daily trading volume, significantly increases the trading costs of large investors, and generates billions of dollars a year in profits for a small number of HFT firms and other parties in the speed race, who then have significant incentive to preserve the status quo,” they write.