Comments on: The problems of HFT, Joe Stiglitz edition A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Stiglitzator Fri, 25 Apr 2014 14:52:51 +0000 I have the feeling Michael Stewart doesn’t believe the ridiculous anti-HFT nonsense in his own book. The entire “controversy” is simply Stewart deciding to amplify an irrelevant bandwagon to stir up the politicians and the ignorati and profit.

Stiglitz is delusional so he might actually believe the nonsense he is spouting here.

By: DrWex Wed, 23 Apr 2014 20:23:14 +0000 You have the general picture right but you’re missing some of the points as I read the paper. You say, “But even if you’re agnostic about whether trade profits go to investors or robots, there are undeniably real-world costs to HFT”.

If you said “…there are undeniably real-world costs to trading” then I’d agree. The costs are not qualitatively different due to HFT. Steiglitz’s argument, as I read them, are structural and apply to all trading.

You wrote, “higher volatility is in general a bad thing, from the point of view of the total benefit that an economy gets from markets.” What I take Steiglitz to be saying is that people seem to prefer less volatility and therefore we infer that volatility is not a social benefit. That doesn’t make it an economic total bad things, afaict.

“the president of a big hedge fund uses his online brokerage account to put in an order to buy a small ETF — and immediately the price on the Bloomberg terminal jumps, before he even hits “execute”. ” – If he never hit Execute then that order never went to market so I can’t see how any change in the ETF’s price is relevant. The hedge fund president’s system might have been hacked or leaked information or something, but that’s malware, not behavior of markets with respect to HFT.

“markets are overwhelmed with quote-stuffing” and “market makers may or may not have been important in the past, but they’re certainly few and far between today.” It’s harder to market-make in high-volume, highly liquid stocks like the Dow or the Nasdaq 100, but even if you take a broad index like the S&P there’s plenty of market-making going on there. All the big banks have market-makers and there’s still competition for order flow in order to get market-maker rights in different equities. Considered broadly across the 35,000 or so listed equities there’s plenty of market-making going on.

In general I think you miss the mark with your entire discussion of liquidity, which is the ability to transact a symbol when I want to in the quantities I want to.

Finally, a transaction tax would not address the worst problems of HFT, which is using orders for discovery (quote stuffing). IOCs almost never fill so wouldn’t be affected by a transaction tax. If you taxed the placement of orders then you simply drive the activity elsewhere. Markets have been offering rebates for liquidity providers for years because the money follows the money – markets with more flow have more liquidity and attract more business. Rebates are, in effect, paying for flow. You also have to address the question of who gets the tax because the tax is an additional rent; adding a tax increases rent-seeking.

By: Endmathabusenow Wed, 23 Apr 2014 16:19:11 +0000 There is one twist to the umbrella paradox–there is an incentive for people to develop predictions about rain. There is even the possibility of people selling their predictions to potential umbrella consumers.

Then when rain is likely the person who values staying dry more will pay more for the umbrella and the other person won’t suffer too much by getting wet.

Of course the person who stays dry may simply have more money to bid up the price of the umbrella; but that fact also provides people an incentive to produce so they can obtain the consumption permits (money) to stay dry.

I know there are plenty of “holes” in these arguments (e.g. perhaps the poor person has a medical condition that will result in his death if he lacks the umbrella); but there is no perfect system.

By: dsquared Tue, 22 Apr 2014 06:59:45 +0000 In the “umbrella” argument, isn’t it kind of the point that the guy who keeps getting rained on now has an incentive to get an umbrella of his own?

By: EllieK Sun, 20 Apr 2014 09:07:21 +0000 No, not malicious. Developers of malignant computation seek to ensure its survival at the expense of the overall marketplace:

“The Skynet hypothesis is a boogeyman intended to scare the young and the paranoid. The real threat from AI is that it will become so good at the pointless tasks that we have given it that they will become a black hole of resources…This has already happened with high-frequency trading on Wall Street. There is an ongoing arms race between computers that trade stocks to see which one can get the edge over the other. Capital markets serve a function in society. They ensure that businesses that provide value to society will have access to large amounts of capital to invest in otherwise too expensive projects. I have not been able to think of a single way in which the high-frequency trading platforms have improved the markets capacity to serve that function…Malignant computing is a problem in cryptocurrencies too.”
via nt-computation.html

Although over-simplified, even idealized, it is mostly correct. Unfortunately, such sentiments are rarely expressed in ubertech. Perhaps he is also correct about crypto-currency, as a response to the general impression that banks, governments and markets failed to protect the public interest. The crypto-currency concept was extant for more than a decade, but the rise of bitcoin only began in the aftermath of the sub-prime mortgage crisis.

By: EllieK Sun, 20 Apr 2014 05:11:10 +0000 Nice post, Felix! Now if only Berkeley economists who have become neo-liberals overnight, e.g. BdL, would see the light.

Even the bitcoin and programmer crowd has similar thoughts on high frequency trading. They call it malicious computing.

By: Matt-Hurd Fri, 18 Apr 2014 01:10:27 +0000 Thoughtful post. However the zero-sum or negative-sum game line is old and tired. It is not. Wealth effects and inter-market linkages ensure that is the case. Markets have a purpose.

Does HFT help the price discovery? Yes. Does HFT assist in keeping markets in sync and more rational? Yes.

Is there too much emphasis on financial services? Could it be 2% of GDP instead of 7% of GDP? Probably, but that is a different question.

By: coffeebreath Thu, 17 Apr 2014 22:00:50 +0000 dedalus – can you explain your comment on dark pools another way? i don’t quite follow it, but i’m not that knowledgable in this domain.

Regardless, I don’t think that Stiglitz’s critique rests on dark pools vs transparent markets.

Felix, I appreciate this summary and the direction to an excellent piece.

By: NaturalLiquid Thu, 17 Apr 2014 19:27:11 +0000 Your statement about it reducing natural liquidity is non-sense. You NEVER put a large order out because of market impact and adverse selection risk. This was standard practice DECADES before HFT.

By: abnewallo Thu, 17 Apr 2014 13:27:43 +0000 The strategies over the supply and demand curve is now more in the hands of the robots and a little less in the company’s. The algorithm writers are now the ones doing the game playing guided of course by the companies’ forecasts and the real-money investors.

Unless there is a way to discount all these potential efficiency gains then I would leave it alone for now at least.