stocktrading.com
blog.themistrading.com
mrswing.com
Debunking Six Myths of HFT
highfrequencytradingreview.com
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Frank, there are several varieties of HFT, and issues differ. Some are ethical, some operational. Already, some changes have been made. I've seen no study that relates HFT to garden-variety crashes that we've known in the past. This paper compares such crashes to forest fires:
math.uu.se
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In principle, it seems logical that HFTs should replace liquidity driven from the market (see the first link) and which their collective trading practically eliminated in the Flash Crash. But if they are forced to provide liquidity, will that solve the problem?
Or are the objections of HFTs based simply on the fact that providing liquidity increases costs, or reduces profits?
The failures in financial reform have taught us how deeply (and apparently irreparably) the financial sector has captured regulators and legislators. We have good reason to mistrust their rationalizations, which appear to be guided more by self-interest and profit than the public interest. How are we to interpret the complaints (above) by Bright Trading and Themis? Are they just bad-mouthing change, or are they saying something valid?
Finally how HFT affects, and will be affected by garden-variety crashes appears to be unknown. Once again, nobody seems to have projected outside the box. Evidence so far is discouraging: by itself, HFT has crashed markets many times, and losses have been incurred. In a still-greater market event, what makes us think that HFT will do anything but magnify the impact and damage?
Is the alleged increase in efficiency worth the added risk? No one knows. This is an addition to a "system" where no simulations were run, no risk evaluations, no input screens. We've already seen allegations of algorithmic failures sufficient to make us believe it's possible to intentionally crash the markets.
In view of facts it seems obvious that HFT's effect on markets is still a big unknown, slanted to the negative. Probably a big crash would be worsened. Beyond that we are guided only by predictions of Mandelbrot and others: time and probability may reveal that once again the financial sector took the profits while the cost and the risk was borne by the public.
Jim |
