Wednesday, July 29, 2009

HFT goes mainstream

Is high frequency trading a good or bad thing?

Prices in financial markets always balance supply and demand. But when the price changes themselves influence the supply and demand, some odd things happen.

Posted by devo @ 11:18 PM (810 views)
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4 thoughts on “HFT goes mainstream

  • Powerful computers, mathematical formulae for calculating the value of hedge bets, almost free credit and free access to the casino gave birth to high-frequency trading in cross-bets on which way currencies, interest rates, stocks, bonds, packaged mortgages and commodities will go in the next second. The volatility this trading generates is the very thing that creates profit for the traders.

    The trades that bankrupted AIG (via its guarantees of hedge-fund counterparty insurance) were placed in this way. The games are zero-sum. The traders use other people’s money (the rich or banks or institutional “investors”) and as soon as a profit is made they pay themselves commissions and bonuses (taxed, in the US at least, as capital gains – lower than income tax). When the day of reckoning comes there are winners and losers. The traders at the losing firms have also taken out bonuses and commisions so there’s a massive shortfall. Before the game can be closed the losers have to be bailed out. So again the taxpayer is the loser.

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  • shipbuilder says:

    Is not this just the logical conclusion of capitalism, i.e. the focus on money before anything else – that the need to produce and sell anything eventually gets cut out of the loop and then everyone’s aim is to make money from essentially nothing? Even, in the case of Porsche/VW for example, companies in the ‘real’ economy start to get in on the act. It’s the classic snake eating its own tail.
    The illusion that everyone can win, the absence of sustainability. It’s always been there, but this time we’ve seen through it much quicker. What happens to real people, natural resources, jobs when the tail starts wagging the dog and the share price becomes the first concern of a CEO?

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  • shipbuilder says:

    Good find, Devo. It’s a pity this didn’t get more comments because in my opinion this is a huge issue that is rarely talked about. Or more accurately when the questions are asked they are dismissed as the naive witterings of a socialist. What do I know, eh? I probably just don’t understand.

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  • [email protected]: becomes? It’s been the first, and commonly only, concern of a CEO for decades. Robert C. Townsend warned against it in his book ‘Up The Organization’, published in the early 60s. The stock price is a concern for transient shareholders who want to cut-and-run at short notice, and they appoint the board of directors, therefore indirectly appointing the CEO. Townsend talks of the CEO having to resist the Board’s attempts to increase his salary, something he was able to do as he was a major shareholder of Avis when he ran it.

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