High Frequency Trading
Seems like all Tyler Durden from ZeroHedge.com does anymore is bitch
about Goldman Sachs and their high frequency trading. Some readers from
MarginalRevolution.com asked Cowen what the deal was with high
frequency trading and I found his comments to be pretty illuminating
and helpful in calming down some of the mass hysteria that ZeroHedge is
caught up in. Here was ZeroHedge’s critique: Goldman’s $4 Billion High Frequency Trading Wildcard
If you don’t know what high frequency trading is: click here
The upshot of the criticism (at least at ZeroHedge) is that it is
unfair because some traders have better computers, and better quants,
than do others. The traders with the most powerful systems get there
first and make more money.
MarginalRevolution (full post here) made the point that
Telegraphs and telephones also brought their own, earlier versions of
high-frequency trading. As did stock index futures. There are
second-best arguments relating to hockey helmets and the like but that
is the case with most forms of progress and greater economic speed. You
don’t have to think that the current profits measure the current social
value of high-frequency trading to argue that the overall trend should
be allowed. The correct judgment of efficiency occurs at the
system-wide level, not at the level of the individual trading strategy.
The short-run story is that private profits exceed social returns but
in the longer run the trading activity and liquidity brings increasing
social returns and better communication of information.
In other words, critics like ZeroHedge are sort of falling for this
populist notion that we should pare back the advances in technology and
speed of trading because these traders have an “unfair” advantage. But
this is making the classic mistake of looking only at the (supposed)
short-term and localized consequences only. There is a strong argument
that the direction of high frequency trading should be allowed since it
has the potential to provide liquidity to the market. If you don’t like
the whiplash that the HFT can produce, then trade on a longer term
scale (pretty easy to do considering that GS is trading at milliseconds
intervals).
I should note that I have allegiances to no one. GS might be guilty
of frontrunning and all other sorts of egregious stuff, but we
shouldn’t let this cloud our thinking and buy in to the populust uprise
against this stuff.
More from MarginalRevolution on HFT