The arguments against HFT
People are still whining about HFT. I’m still annoyed at whiners and doom sayers. This has been going on long enough, and enough hot hair has been expelled on this subject, a taxonomy of the contra-arguments is called for.
- It’s not faaaaaiiiiir because I can’t do it. This is the Chuck Schumer/Themis argument. The fact of the matter is: nothing about finance is fair, because not everyone can do everything in finance. Why can’t I borrow at the repo rate, and where’s my goddamned bailout money, Chuckie? No fair, yo! If people knew the enormous list of things which the individual investor couldn’t do, well, they’d be peeved about a lot of things. Why can’t I underwrite insurance? Why can’t I have access to Goldman’s data on dark liquidity pools? Why don’t I have 20 awesome Ph.D.’s of the capabilities of Lenny Baum working for me, like Jim Simons used to at Rentech? Why can’t I have all the data sources that a fund has, so I can do stuff like trade on SEC data? The answer is: that’s life. Some people has, some people has not. Amusingly, the individual investor can do things like trade on inside information and can generally get away with it better than SEC monitored funds do; nobody ever complains about that.
- Technology: it’s scaaaaaaary. HFT may turn into skynet and take over the world! This argument probably dates back to some australopithecus who was worried fire might cause cancer in rats. Sure, we could regulate trading such that some arbitrary time scale makes up a tick. Who makes that choice? Large market participants seem to like the idea of regulation. You know why? Because they’re the ones who are going to write the regulations. Don’t believe me? Go read something written by a government bureaucrat. What, did you actually think they work for the little guy? They don’t: not any more than Chuckie Schumer is a modern day Cincinnatus.
- I am a communist revolutionary, and I don’t want to pay for liquidity. Liquidity should be provided by government functionaries, appointed by proletarian revolutionaries. Also, trade should be banned, as well as money. Our modern economy will be denoted in locally-grown carbon-neutral seashells. Quite a lot of the arguments fit into this category. If you don’t believe in trade, well, I guess I don’t have a good come back. Have fun eating gruel.
- I am someone who will benefit from wider spreads caused by knocking out the legions of small HFT players. This is never the stated reason, but it’s almost always the actual reason. This is the actual reason most regulatory laws are passed in the modern age: because someone who bribed a congressman wanted ‘em passed. See the link in #2 for more insights.
- They’re stealing from the small investor! No, they’re actually providing a cheap service to the small investor. Hundreds of HFT’s are competing for your liquidity dollar, making spreads lower than at any point in human history. You know who really steals from the small investor? Brokers, incompetent money managers, the government who taxes everyone to penury and prints worthless dollars, incompetent and self-serving boards of directors and management, and media crooks who dispense lousy hype, either through incompetence or corruption. Of course, unlike HFT firms, these sorts of rip-off artists have well paid media flunkies and Washington lobbyists, so nobody ever notices. Blaming HFT firms for whatever financial problems we presently experience is like blaming Apple computer for the problems with Alar because they use the word “apple.”
I tire of this artificial “controversy.” No, I don’t have skin in this game, other than being someone who benefits from the cheap spreads provided by hundreds of little HFT’s. I don’t work in this space, and have no immediate plans to do so. This “controversy” is a distraction; a sort of sleight of hand applied to mass media misinformation about a poorly understood subject. Of all the myriad of subjects people could get bent out of shape about our financial system, of all the potential dangers presently faced by America and the world financial system, this is the least worrisome. Why not agitate for the breakup of firms which are “too big to fail?” Why don’t people worry about the preposterous pyramid scheme we call the US government and Federal Reserve system? Why don’t people complain when their jobs are outsourced? Why aren’t shareholders agitating for more board accountability? Why is nobody noticing the fact that nothing has appreciably changed since 2007? No, no, we must punish one of the few honest and competent areas of the financial system: after all, they’re making money.
This “controversy” is offensively dumb. Yet, so few people understand anything about it beyond “they make money,” I figure I’m going to have to hear about it for years to come. Get back to me when someone comes up with a better argument against HFT which isn’t one of the above 5; until then, you’re a moron and I’m not listening to you.