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.
Wrote up a bit for Taki’s mag which should be of broader appeal to many readers here.
A few ideas from Quants I know.
We’ve heard enough from the banksters; time to listen to the quants.
I’ve been sent this “article” a number of times recently by people who don’t care about my blood pressure. Like most mass media expositions where the reporter is out of his depth (aka virtually everything you read anywhere), it ends up being a recitation of the talking points of someone with an agenda, aka the entrenched powers, and other people who can afford marketing campaigns and press agents. The state of modern democracy being what it is, I have no doubt the dirtballs who originated these talking points will get their way in this matter just as they did with the recent “health care reform” -what I like to call “the continued insurance company, government agency and AMA gravy train act.”
Correcting these bozos is a sisyphean task, and I’m already sick of doing it, but I’m going to anyway, with excerpts and translations.
“But he thinks that without better regulation, more algo-gone-wild scenarios are inevitable. He notes that while controls at big firms, like Citi, are generally exemplary, second- and third-tier firms present a graver risk.”
Yessiree; let’s hand over all our liquidity provision to the geniuses who destroyed the economy in 2008. What a brilliant idea. They’re too big to fail, after all. What could possibly go wrong with only letting “first tier firms” participate in the market? Sure, the little guy doesn’t have as many safeguards; he also controls hundreds or thousands of times less capital.
“The SEC wants to hire a lot more staffers, both for its new risk division and for its trading division, and it is considering new methods of tracking algorithmic trades”
Well, that’s a surprise: a modern American government bureaucracy who wants to hire a “lot more staffers!” Usually they meticulously squeeze every penny of value from each bureaucrat, whose every waking moment is devoted to their mission, so the taxpayer gets best value for his money. Since the SEC did so well in 2008, giving them lots of money and power is the obvious solution.
“The commission also may soon outlaw a practice called “naked access,” in which some broker-dealers offer their clients direct access to exchanges—allowing them to potentially bypass risk controls—in pursuit of faster trading.”
Obviously, having 2-3 really good companies doing direct market access is, like, way better than 1000 little ones who all do it a little bit different with vastly smaller amounts of money. By this logic, distribution of all goods and services in America should be done by Walmart. All food will now be distributed by MacDonalds: they have really excellent food safety compared to most people’s kitchens. Or hell, let’s just nationalize it all and spend the rest of our lives eating gruel and hunting thought criminals, like the proles in Metropolis.
“At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors.”
Oh no; liquidity providers are stealing from Widows and Orphans! Wheras market specialists, operated by the beneficent charities known as Citi, JPM or Goldman; which is what we’d get if we restrict this business, would never, ever, ever do such a thing, right? What this knucklehead journalist is describing is called “providing liquidity.” If the pension funds don’t know how to look for cheap liquidity, that’s because they don’t care about their investors. This isn’t mere Locklin hyperbole: this is direct business experience. I’ve pointed out where people are getting robbed by placing orders for giant lots, and they merely shrug. What do they care? It ain’t their money! So, rather than pointing out the pension fund managers who are actually stealing billions in unearned management fees from widows and orphans via their laziness and ineptitude: they go after the little guy who is just buying and selling competently, because it’s his money at risk.
“…says Joe Saluzzi”
We already know about Joe Saluzzi -the fellow who thinks it’s his civil right to profitably trade using a squawk box and ticker tape. If we listened to guys like him 100 years ago, we’d still be stepping in horse pookey when we cross the street.
I’ve spent a good fraction of the last two years of my life developing tools to be used in this business. Should these talking points be turned into laws, assuming I don’t do something like move into a yurt in Mongolia and write anarchist manifestoes for the rest of my naturals, this means I (and everyone else who does this) will go work for one of these gigantor companies. Rather than keeping the half of the fruit of my labor the government allows me to keep, I’ll hand most of it over to some faceless ingrate and toady for a bonus like everyone else does. If they succeed in making liquidity provision the domain of large entrenched bureaucracies, you will pay more, rather than less for it, and it will be dealt out by powerful cartels rather than risk taking individuals. What they are proposing is like banning all non-chain restaurants because someone might get food poisoning at a greasy spoon, and because individually owned restaurants are more profitable than chain franchises. I, personally, don’t want to live in that world. Neither will anyone else: trade flow will simply move elsewhere, and Wall Street will end up looking like the ruins of Detroit.
The anti HFT moral panic is a naked power grab by large firms who don’t want to have to compete with the small businessman. The fact that it is perpetuated by “journalists” who are supposed to be watch guards protecting the little guy is an obscene perversion. Pardon me if I shed no tears for them as they’re made obsolete by the internets. When they stop acting as mouthpieces for the people who are turning my country into a 21st century version of the Byzantine empire, perhaps I’ll develop some sympathy for them.
I came across this in one of the Economist’s “Free exchange” blogs: (via NP)
The funny thing is that according to Sebastian Mallaby’s new hedge fund history, “More Money Than God”, the willingness to explore unexplained correlations is what sets Renaissance apart from other quant funds (full disclosure: Mr Mallaby is married to The Economist’s Economics Editor). Where other funds might recruit employees with financial or economic backgrounds and have them test hypotheses against data, Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense.
One of the many truly funny things about this is the implication that, say, some dude with a financial or economic background is better at hypothesis testing things than a physicist or applied mathematician. Here’s a thought for “R.A.” -maybe scientists think to look for actual -rather than spurious correlations in places that economists don’t? And maybe they don’t look for spurious correlations in places economists insist they must be? Economics isn’t much of a science; I’d characterize it as somewhere around the four humor theory of medieval medicine. Not completely wrong, but not particularly right either, and a gratuitous over simplification of how things really work. The type of reasoning that goes into it isn’t necessarily wrong, but it’s obviously pre-scientific. Some medieval doctors were probably very good doctors, and some traders are probably very good economists, but it’s a lot easier to pick a good medieval mathematician than it is a good medieval doctor. And you know you could train the math guy to be a doctor. That’s kind of the idea of hiring science nerds to do applied economics.
Does RenTech preferentially select people without financial knowledge? Yes, I know for a fact that they do, because a former Medallion alum laughed uproariously at the fact that I was taking the CFA (I didn’t bother taking the test in the end: thanks, doc: you saved me some money). Does that mean they bet on things like astrology applied to futures markets? I kind of doubt it. In a real science, people like to get the right answer: not the ideologically correct answer. That’s why RenTech hires scientists, and people like Natural language translation experts. There is a right answer, and those people are the types who go out and find it, based on minimal clues.
But having the guts to trade relationships no one else can understand or explain would be one way to consistently beat the market over a period of two decades.
Um, no; that’s how you lose all your money in two weeks.
One of the many horrible things about reading this sort of thing: The Economist is probably the best magazine in the world. Read by leaders, diplomats, CIA operatives, and bigshots the world round. If they’re this laughably wrong in such a simple matter, how can you believe anything they say? I mean, why would anyone think RenTech looks like a Thomas Dolby video?