This is an... extraordinary article in the Wall Street Journal about stock internalization, etc.https://www.wsj.com/articles/exchanges-vie-with-ultrafast-traders-for-mom-and-pop-stock-orders-11568808000 …
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Also, from a "Why do we have stock exchanges, at all?" perspective, they form Schelling points to aggregate demand and supply. It is *extremely unlikely* that there are 100 dentists, engineers, and small business owners who want ~$22k of Apple at *exactly* time hedge fund sells.
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Thus the existence of market makers, including HFTs, who guarantee (for institutional investors) that if you want to sell 10k shares of Apple immediately for ~$2.2 million that you will be able to do this at a frictional cost so low that you'd assume I'm joking.
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when you place large orders you can move the underlying security against you put say $20k to $50k into FNKO & the stock might move about a half-percent. picking off selling (or buying) in bits & pieces allows one to enter or exit a position without moving the market
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Yes, block orders causing price impact is one of the core challenges of trading execution. You can break your order into many orders and attempt to execute it over time; the tradeoff is that you lose execution certainty.
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To what degree do you suppose this is a matter of 'humans are irrational'? i.e.: I didn't maximize my wins, therefor I lose. Now I have an internal heuristic I get to share with everyone I know.
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The psychology of loss aversion is certainly at play here, especially when it comes to the retail-vs-HFT-vs-institutional spats. When everyone wants the best price and only wants others to sacrifice for them to get it, no one will ever be happy.
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The argument here is an informational edge over the execution timeframe. If the hedge fund knows there is an 80% chance the price will fall over 24h, the institutional buyer thinks it's 60% and the retail buyer is 50% (no info), the HF gets a better price from the retail buyer.
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But the article is poorly written and blends/confounds a few concepts
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