The Matrix, but with money: the world of high-speed trading
[A more complete description of HFT]
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Too much, too fast?
Apart from the issues of transparency and oversight raised by the HFT approaches described above, there's also the possibility that HFT, with all of its enormous speed and complete automation, poses a larger systemic risk to our markets.
I mentioned earlier in this article that high-frequency trading was "estimated" to account for between 60 and 75 percent of all available market volume. This number, which you might think would be important to know, is only one of a number of survey-based, ballpark estimates; the real numbers aren't knowable because algo trades aren't marked as such. In other words, we have no way to tell how much of the current stock market activity—both prices and volume—is the result of computers trading against each other in the manner described above.
It's also not clear whether all of this computerized buying and selling is actually good for the markets and for society as a whole. Couldn't we as a society better spend all of this money, computer power, and PhD brainpower on, say, coming up with a fossil fuel replacement? Supporters of HFT respond that their platforms provide much-needed market liquidity. They argue that, without HFT, there may not be enough buyers or sellers for a particular asset, so the market in that asset just stops functioning smoothly.
Not everyone is convinced that liquidity is worth the attendant risks of HFT, which are very difficult to quantify when you're looking at HFT's potential impact on the market as a whole.
Apart from the issues of transparency and oversight raised by the HFT approaches described above, there's also the possibility that HFT, with all of its enormous speed and complete automation, poses a larger systemic risk to our markets.
At the back of everyone's mind is the 1987 program trading crash, described by Richard Bookstaber in A Demon of our Own Design. In the run-up to October of 1987, all of the major market participants had been using essentially the same computer-automated algorithm to hedge their portfolio risk. On Black Monday (10/19/1987), all of the portfolio insurance programs started dumping assets in lock-step, in response to a particular set of inputs. This synchronized selling begat more synchronized selling, and by the time this giant, market-sized feedback loop was shut down by the closing bell, the Dow had lost almost 23 percent of its value in a single day.
Most of the debate around HFT is between those who think that a similar crash could not only happen again, but could be many times worse because the aforementioned increases in speed and trading volume, and those who insist that we don't yet know enough to make that call. It could be that this fast-moving system as a whole could quickly and dramatically fail in some unforeseen way, due to a combination of an external shock and unseen internal fragility; or, it could be redundant and robust enough to keep humming along in the face of anything we (or Mother Nature) throw at it.
Either way, though, HFT's combination of speed, volume, secrecy, and lack of human oversight and intervention worries even those who trust the human players not use their machines to cheat at the game.
arstechnica.com
Jim |
