"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Tuesday, December 4, 2012

Clarity Around The Debate

I wish to address what I see as confusion around the problems with HFT, some of which I may have added to myself with broad statements about HFT either in posts on Zerohedge/Floating Path/CC or on twitter.  In the early stages, thanks to next to no information, I made the mistake of not distinguishing between bad high frequency traders and good high frequency traders.  In my Zerohedge post I address this.

Many people have voiced an agreeing opinion about the negative effects of high-speed, automated trading.  Regular traders, not long-term investors, have claimed problems with mini-flash crashes, mini-flash smashes, very wide spreads, and quotes fluttering all over their books but no trades being made.  All things I have seen myself and documented.  This does not mean that every single HFTer does this.

What I have noticed however is that some very legit HFTers (@Jaffray - Hedge Fund Wizards and @MarcosCarreira) are being unduly lumped into the wrong crowd.  I appreciate very much their willingness to engage with me on Twitter (well aware of the severe limitations to doing such we nonetheless pull it off ) in defense of HFT.  To the best of my knowledge neither of these two are using expert-networks to establish special connections which allow them to execute orders which have not been allowed by the regulating bodies, such as Hide-Not-Slide.  I also doubt they test their systems in the open market like we've seen before.

Though I dislike the idea of someone making thousands of trades inside of 1 second, a participants desire to do so should not be restricted aside from the enforcement of rules already established, such as placing orders not intended to be executed so as to "gum the system".  What does need to stop is the willingness of the for-profit exchanges to cater to certain big-swinging-dick HFT in a race to capture the most fees and "volume".  This is where I want to focus the debate from my perspective.  We can't be blasting the entire SEC when we can identify specifically who is failing at their job.

So, to be clear...not all HFT are bad, there are good algorithms and bad algorithms.  What is bad is expert-networks offering an edge to special entities which are motivated by the desire to capture fees and provide a "popular" market place.

Side note:  In the next couple of days, when I get some free time, I will address the Andrei Kirilenko findings.