What you see in the financial industry are asset managers under pressure to perform and because they have visibly underperformed their benchmarks, it leads to a case of 'sour grapes', a typical scapegoat syndrome. In an interview, Tradeworx CEO Manaj Narang, leads us to an additional point of interest which is that the uproar against HFT could be due to the disruptive nature technology has on old business models that then results in defensive behaviour where the slow to react complain. It would be like condemning all brokerage houses for making profits when very few of them take part in illegal activities. It is however no different than two discretionary fund managers taking part in insider trading. I agree that market manipulation is unethical, but HFT is not the devil, it is the use of high frequency tactics in unethical practices (quote stuffing, cross market layering and computerized front running to name a few). Let's just stop and look at that for a second. The whole topic has become very sensational, to the point where influential persons believe that the stock market is rigged and HFT is to blame. ![]() I'm not blind to the new problems that HFT introduces and I certainly don't pretend to be but I'm just putting things in perspective. So why does the focus keep coming back to HFT? ![]() If we reconstruct the 6th of May 2010 using exactly the same sequence of events, there is no guarantee that the crash would happen again. According to Dave Lauer, a previous trader and analyst at top HFT firms Austin and Citadel, you can't explain the Flash Crash using a cause and effect methodology. The cherry on the top for me as a "wanabe" poster boy for disruptive innovations is when I heard the hypothesis that HFT systems helped improve the situation by aiding in correcting the market. Of course there are those that argue HFT systems blocked the network, but regulators concluded that HFT as such was not to blame for the crash. The SEC launched a full scale investigation for months, ferreting for answers, only to blame it on a single algorithm and technological problems. The truth is that there is too much smoke and fog surrounding the Flash Crash for anyone to blame it on HFT. A common example being the Twitter Crash where the Associated Press was hacked and released a tweet stating that the White House had been bombed: you can imagine the havoc that followed. Protestors then back this up with a cheeky smile and point fingers to similar crashes. The first obstacle thrown at advocates of HFT is usually the Flash Crash of May 2010, where the Dow Jones dropped 1000 points in half an hour and then bounced back equally as fast. Why are people making such a big deal about HFT? The major concern from sceptics being: does it now pose a systemic risk due to the fact that around 70% of the trading volume on the American equity markets is generated by HFT? It all started not so long ago when the SEC authorised electronic exchanges in the late 90s but HFT only really hit the ground in 2006 – 2007 and has since caught the attention of public. ![]() HFT is defined as a quantitative trading technique that utilises super computers and complex algorithms to push mass volumes, with some HFT firms like Citadel trading more stocks every day than the New York Stock Exchange (Meerman, 2013), with holding periods of but a few microseconds, keeping in mind that it takes up to 400'000 microseconds to blink. " The biggest surprise to me was his comment, "The United States Stock market is rigged!" Talk about a sensational notion. They are able to see your order and place it against other orders in ways that you don't understand. Recently, on 31 March 2014 there was an interview by CBS 60 Seconds in which famous author Michael Lewis states: "The insiders are able to move faster than you. A strange world where we are trapped somewhere between the Matrix and Terminator franchises. I see it now this is tomorrow's over dramatised headline. ![]() Humans - have a strength that cannot be measured." (Terminator Salvation) We have been fighting a long time and we are outnumbered by machines. "This is John Connor - if you are reading this, you are the Resistance.
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