Michael Lewis has a new book out. During a 60 Minutes interview this past Sunday, he described how high frequency trading is legalized theft. From Vanity Fair:
In a nutshell, Lewis writes in his new book, Flash Boys: A Wall Street Revolt (itself an outgrowth of this Vanity Fair article from 2013),
what’s happening is that some savvy, if unscrupulous, traders are using
their ability to operate faster than everyone else to make some free
money. The easiest technique to explain involves spotting someone else’s
intention to purchase some stocks, jumping ahead of them to make the
buy, and then selling the shares to the intended buyer at a slightly
inflated price. (In fact, Lewis explains in this excerpt, these high-speed traders make a lot more
money on something called “slow-market arbitrage”: “This occurred when a
high-frequency trader was able to see the price of a stock change on
one exchange and pick off orders sitting on other exchanges before those
exchanges were able to react.”)
From The Wire:
The FBI has disclosed a year-long investigation into the questionable
practices of high-frequency trading less than 24 hours after the rest
of the world discovered how suspect the practice can be.
The Wall Street Journal reports the Federal Bureau of Investigation opened an investigation into high frequency trading on Wall Street about a year ago. "Trading
ahead of other investors based on information about orders that other
investors can't see could violate insider-trading laws," an FBI spokesperson explained to the Journal.
The FBI joins investigations into high-frequency trading by the
Securities and Exchange Commission and the New York Attorney General's
office. CBS News and various others have confirmed the existence of the FBI's investigation.
So....what is high frequency trading and why should we care? Something between 50 and 70% of all trades are HFT. (see here) What do you think?
This is so cool I watched a youtube video about this topic. It's amazing that 50%+ of trades are hft.
ReplyDeleteMy contribution to this post is that I plan on working for the FBI.
ReplyDeleteMichael Lewis is an awesome writer.
ReplyDeleteMe too..
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ReplyDeleteme four!
ReplyDeleteI have always been aware of the controversy surrounding HFT and how the stock market can fluctuate based on computer programs and algorithms. However, what shocked me is the share of all trades HFTs hold. I always assumed it held a minority share of all trades. As someone who believes that humans make better business decisions in the long-run, this situation worries me.
ReplyDelete- Tyler McFarland
Indeed
ReplyDeleteThis is interesting. I am curious about what will happen with these investigations.
ReplyDelete- Jacob Olds
I take my comment back. After doing extensive research, I have found that despite the disadvantages of HFT (ex: market volatility), the benefits of HFT outweigh the costs. HFT has led to lower trade costs, higher profits in the equity industry and increased returns. In simple terms, HFT requires quick decision making and up-to-date information and computers happen to faster (much faster) than humans in rapid security trading. HFT is a new form of trading and any infant form of technology always runs into trouble in its early stages, so I believe HFT will improve over time.
ReplyDeleteHere is a WSJ opinion article: http://online.wsj.com/news/articles/SB10001424052702303978304579475102237652362?KEYWORDS=high+frequency+trading&mg=reno64-wsj
ReplyDeleteI agree with you (Tyler) on the benefits of HFT but I think you're missing the real problem. Not all people have access to this technology. When someone is both a broker and principal at the same time, they can use the knowledge that someone else is going to take a position to their advantage. Brokers are supposed to uphold equity in the market; that is, they should make sure all trading parties have an equal playing field regardless of how fast each party can execute of trade.
ReplyDeleteI recommend people to watch this ‘Epic’ debate on high-frequency trading between Michael Lewis, Brad Katsuyama and William O’Brien.
ReplyDeletehttp://blogs.marketwatch.com/thetell/2014/04/01/epic-debate-on-high-frequency-trading-between-michael-lewis-brad-katsuyama-and-william-obrien/
I think it's interesting that despite the pervasiveness of HFT, profits in the industry have been falling in recent years (http://www.businessweek.com/articles/2013-06-06/how-the-robots-lost-high-frequency-tradings-rise-and-fall#p2).
ReplyDeleteI agree with Tyler that are pros/cons to the industry, but from what I gather it is heavily debated among academics whether the pros outweigh the cons. Given the nature of HFT (e.g. proprietary firms, quantity of data), it is difficult to find robust data sets to study and disentangle effects.
I agree with you Hikaru. I took principles of investment in my junior year and we did not discuss the role that technology plays in investing. does this mean that there is need to modify some investment theories (such as the efficient market hypothesis) to incorporate the impacts of technology in investing?
ReplyDeleteThis is an unfamiliar topic to me and it is helpful to see the discussion of others.
ReplyDeleteI also think the same as Ly, unfamiliar topic, but helpful to get to know and discuss.
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