High Frequency Trading and its Irrational Defense


High frequency trading has been pulling the equivalent of an “Office Space” scam on the markets since, well, the day after electronic markets were opened in 1999.  The recent backlash by the general public takes me a bit by surprise.  My consulting and infrastructure teams have built a few of these Pied Pipers of network latency and I just figured nobody cared.  Apparently, they do.  And, also apparently, Michael Santoli is playing defense.

His entire argument rests on the following paragraph, and he restates it repeatedly…

Small investors, whether they acknowledge it or not, are tremendous beneficiaries of the cutthroat cyber-jockeying among electronic trading firms. Competition for public orders and a huge investment in the technological plumbing of the markets have given stay-at-home investors $8 commissions and instant trade executions at the best available price for a stock or exchange-traded fund.

Michael, you’re high.  We had $8 trades the day electronic markets opened in 1999.  If the little guy is really the beneficiary of this investment I should expect $0.08 trades by now.  Shouldn’t all this market competition drive prices down?  It didn’t, because that’s not what’s happening.  What incentive do these folks have to share their profits with me in the form of lower trade pricing?  None, they’re out to murder me, metaphorically, and anyone who thinks a fellow trader on Wall Street is screwing them over isn’t just probably right…

They’re always right.  Then there’s this gem…

They race to intercept these public orders by matching or beating the best available quoted price for the shares. The high-tech sharpies don’t seek to front-run small-investor orders; they try to take the other side of them, because they’re not seen as the first wave of a rush of “smart-money” institutional trades.

Bullshit.  These folks don’t shave nanoseconds off network latency for the good of the body whole and in service to the invisible hand.  They do it for profit, as they should.  The furor here is over the fact that these people aren’t investing, they’re draining value from the market and are simply profiting on arbitrage (I’m oversimplifying here, this is a tech/astronomy/Geocaching blog, not a finance blog).  If Michael can assert without evidence the HFTrader is in it for the common good, I can just as easily assert without evidence he’s full of shit.

Charles Schwab was actually right last week.  If 95% of all HFT orders are canceled before fulfillment, these people aren’t participating in the market but gaming it.  That there is money in it, billions in fact, is evidenced in the IT budgets of the HFT crowd.  These people aren’t investing, they’re flipping bits.  They’re moving fiber optic lines to shave less then a single wavelength of light off transmission times and the compute power necessary to make and cancel that many orders at that speed is truly astonishing.

And none of it is in a cloud worth using after hours.  The EXAFlops of compute power locked up in that model right now would make even the least greedy BitCoin miner weep.  I know.  I’ve seen it.  It’s awe inspiring and it’s put to use for terrible ends.

But hey, Michael says over and over that being a little bent out of shape over that fact is “irrational” because of all the benefits HFT has brought me, and heck, the financial meltdown was a whole five years ago, which is apparently the equivalent of the 19th century for him.  For me, it was 5 years ago and since then the scale-out has only accelerated for HFT.  You’re going to have to do better than that defense, bub.

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One Response to High Frequency Trading and its Irrational Defense

  1. Peter says:

    Follow-up: I read “Flash Boys: A Wall Street Revolt” after writing this. Decent book, but it definitely leaves a few hanging chads in the story. It’s one of the only occasions I have been able to read a timely book in a timely manner. If that book doesn’t enrage you, not much will.

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