Monday, June 21, 2010

High-Frequency Trading is Good

A couple of years ago I called into a local radio station to defend oil speculators. Today it's high-frequency traders:
Every innovation of this type makes the market more efficient. ... The faster we trade, and the more people you have trading, any aberrations that exist in the market are taken out of the market really really quickly, which makes for a fairer market for all participants ... Those prices are about as fair as they could be.
Here's a good video description of what exactly what HFT is.


  1. I think this might be a legacy notion of the benefits of HFT, but now it is entirely done with computers that trade billions in capital every second.

    I just finished reading "The Qaunts" which shows the dark side of HFT when the algorithm goes wrong. The book focuses on Short Selling, which uses HFT, and how these companies are making money off of a fraction of a cent difference in prices very quickly. We see a huge problem in people that take a short postion and need to unload all the stocks quickly b/c the market is flooded, thus dropping the price and creating a panic. There has to be a better way to make money because this just seems like parlor game.

    Lastly this works great when the prices are right, but when the prices are wrong you can wipe out if you're not hedged properly. . . the main reason for this last melt down.

    If you want a little summer reading I'd recommend "The Quants." Very interesting read, and shed light on a light of the practice on WS that I had no idea existed, or made money.

  2. Sounds like an interesting read, thanks for the suggestions. Though I don't think I'm convinced of the problems with HFT. If the price is wrong, my guess is the more traders there are, the quicker the price will go back to normal. It sounds like a parlor game, and maybe it is, but is a game that makes the market more efficient. Becuase the stock market jumps are essentially random, you should only be investing in the stock market long term. If regular Joes do th is then this is only a problem for the day traders.

  3. Ah, there is the problem. HFT's don't give access to the lay person, but to huge investment banks like Citi and Merril who have these entities short selling massive amounts of stock on a daily basis, trying to ink out a profit on minute shifts in prices.

    If anything HFTs limit the amount of investors because to make it profitable you need to have huge amount of capital.

    I really want to talk to you after you read the book. I have digital copy I can send your way if you'd like.

  4. A digital copy, interesting. I've never read a digital copy of a book. Sign me up!


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