
High-Frequency Trading: Networks of Wealth and the Concentration of Power - ChristianMarks
http://www.uncomputing.org/?p=167
======
ryporter
It's hard to take a criticism of HFT seriously when the author very
confidently asserts a rather extreme definition of it, and thus appears to be
talking about a very different subject matter than what I (and, I believe,
many others) would consider HFT. From page 12,

 _HFT encompasses not simply and not even directly the speed of trading...,
but rather stands in for the general automation of trading...._

 _HFT may be better understood as the name for the suite of effects that
computerization has had on the worlds of securities trading. There is little
controversy about this picture within the trading world, including both
trading firms themselves and the government bodies that regulate them._

In fact, there is an incredible amount of controversy surrounding this point.
According to a CFTC committee [1]:

 _Specifically, the Commission stated that HFT was a form of automated trading
that employs: (a)algorithms for decision making, order initiation, generation,
routing, or execution, for each individual transaction without human
direction; (b)low-latency technology that is designed to minimize response
times, including proximity and co-location services; (c)high speed connections
to markets for order entry; and (d)recurring high message rates (orders,
quotes or cancellations) determined using one or more objective forms of
measurement, including cancel-to-fill ratios._

 _Any definition of HFT should acknowledge that various types of Automated
Trading can exhibit mechanical characteristics of HFT, the commission noted.
“However, for automated trading to be considered HFT it needs to match the
cumulative criteria that comprises the definition, including recurring high
message rates determined using one or more objective forms of measurement.”_

[1] [http://www.securitiestechnologymonitor.com/news/hft-
defined-...](http://www.securitiestechnologymonitor.com/news/hft-defined-by-
cftc-as-subset-of-automated-trading-31398-1.html)

------
confluence
> _One might argue that securities trading is not a representative social
> space, because it is so quantitative, because it is so close to (indeed
> identical with) the movements of pure capital, because it has available to
> it the most powerful computers and most expert computer technicians money
> can buy_

HAHAHA!

Only in finance do people perceive the incumbents as the future winners. I
mean in tech, we mock those with more money, more capital, because we know
that no body lasts - everyone is disrupted, and so it goes. It's kind of like
government conspiracy stuff, where people think that the government is too
incompetent to handle most things, and yet simultaneously believe that somehow
they can pull off insanely complex conspiracies. It's like religious people in
airplanes - nothing funnier.

You can't have your cake and eat it too.

If you knew how stupid a lot of finance guys were - you'd laugh at statements
like this all day long. "Oh no they are bigger than us! Oh no they have better
computers! Oh no PhDs!".

HFT is merely a matchmaker. The thing you really have to worry about is
irrational capital flow to non-useful assets.

87/97/00/07 -> All of them had essentially nothing to do with tech - they just
ran on tech (correlation != causation). It was the idiotic capital allocation
by humans that really fucks things up.

Buying Russian/Asian bonds cheap, thinking nothing will go wrong was stupid.
Buying companies with no earnings was stupid. Building houses in the desert of
Arizona is stupid. Tulip buying is stupid - and that's what all of these
"crises" are about - people fucked up - they bought things high, and didn't
look carefully until the market fell apart.

All problems in financial markets are not driven by black swans. They are
driven by slow moving asteroids - anyone can see miles off if they looked at
it critically.

Forward looking: Silicon Valley is moving towards a bubble. Gov bonds are in a
bubble. Money Markets are in a bubble.

Equity is cheap. High risk bonds are cheap.

------
valuegram
What is the point of this article? HFT provides liquidity, and some would
argue, more accurate equity pricing.

I have never heard anyone say high-frequency trading leads to a more even
distribution of wealth. Since the birth of stock exchanges "trading" has
always been a game where the institutions with greater resources have an
advantage.

Correlating HFT computerization to the general democratization of data, and
it's effect on political institutions is just silly.

~~~
ChristianMarks
The HFT provides liquidity argument overlooks a crucial point: diminishing
returns. You can't increase transaction efficiency indefinitely and expect
that the liquidity at vanishingly small intervals is worth much.

~~~
valuegram
Agreed on the diminishing returns front. Defining necessary/useful liquidity
would be impossible. Markets would absolutely function just fine (as they have
previously) without HFT, but by definition HFT is increasing liquidity.

~~~
ChristianMarks
Not enough to justify, since the value of that liquidity is negligible,
according to researchers.

~~~
valuegram
To be fair "researchers" have also stated the converse:
[http://people.stern.nyu.edu/jhasbrou/Research/Working%20Pape...](http://people.stern.nyu.edu/jhasbrou/Research/Working%20Papers/HS10-11-10.pdf)
[http://www.automatedtrader.net/headlines/127545/hft-helps-
ma...](http://www.automatedtrader.net/headlines/127545/hft-helps-market-
structure-and-liquidity--academic-study-finds)
[http://home.uchicago.edu/~bweller/files/Liquidity_and_High_F...](http://home.uchicago.edu/~bweller/files/Liquidity_and_High_Frequency_Trading.pdf)

Not sure what we're arguing about. I never said HFT is "justified" by its
infusion of liquidity. It is simply a function of High Frequency trading,
whether justified or not.

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anigbrowl
An excellent paper, accessible in prepress form from the link. In a nutshell
the author's thesis is that technology accelerates discontinuities, of wealth
as well as everything else, allowing concentrations of wealth far in excess of
Pareto (or any other) optimality.

~~~
javert
_technology accelerates discontinuities, of wealth as well as everything else,
allowing concentrations of wealth far in excess of Pareto (or any other)
optimality._

It's nonsensical to talk about an "optimal" distribution of wealth.

Also, technology allows for more total production (hence more total wealth),
which would be great, but social policies in the western world inhibit the
general population from scaling the number of children they have to track
labor demand.

~~~
anigbrowl
<http://en.wikipedia.org/wiki/Pareto_distribution>

I should have referred to a 'Pareto distrubtion' rather than 'Pareto
optimality' (which is more properly used to describe production possibility
frontiers), but the underlying concept here is that it's quite natural for
~20% of the population to control ~80% of the wealth, on the basis that
similar proportions recur throughout nature. I think this is 'optimal' insofar
as growth is maximized by such a distribution, but of course you only get such
distributions in theoretically perfect markets.

------
ChristianMarks
When the time horizons of investment houses, hedge funds and quant specialty
shops collapse to the millisecond and microsecond, they have already admitted
that it is very hard to get an informational advantage in the market. Now an
investment insider could do this in many ways: 1) working harder than other
investors, 2) the misuse of nonpublic information through insider trading, 3)
control of the treasury and the Fed and 4) HFT. In the case of HFT the
informational advantage is detecting the state of market direction and
executing trades a microsecond ahead of other investors. What we have here is
money trading among the accounts of the investment elite.

