Let's compare business to football.
Some people become experts in training, coaching and playing football. Others manage teams and learn how to spot talent and work with dynamics between players to create winning combinations. They're trying to raise the bar and increase the level of competition within the game.
Then there is a class of people who don't really add anything to the game, but they want to profit off of it. These are the gamblers.
High frequency traders are like meta-meta-football players. They try to profit off transactions between the gamblers.
Frankly, I don't know how they can look at themselves in the mirror. I wish they would put their minds to good use and actually solve real problems instead of meta ones.
The article does not explain what the high frequency traders, specifically, are doing. But it is by no means necessarily evil. All they are doing is two things: they get their trades into the system quickly, and they get current market conditions quickly.
If there is anything that you should quarrel about, it is that their system is automated. But, still, at the end of the day they're the ones holding the bag. If they blow up, they're going to pay for it.
If they start packaging their complicated and automated trading algorithm as a "bond" and get it AAA rated, and then start selling it to pension funds, then you've got a reason to be pissed.
Whether or not this is an unfair advantage is up for debate.
arbitrage being available exclusively to a small group who also control membership to their own group? corporatism, and obviously bad. this problem of the financial world having insiders and outsiders has nothing to do with high speed arbitrage, that's just an illustration of it.
What resources were you thinking of?
The only resource I can think of that needs instantaneous variation in supply is electricity. Logistics of distribution mean that supply of most other things will only be variable on the order of 6 hours or so. Or do you mean supply of shares to be traded?
As an outsider, trading of securities and derivatives appears to be a long way from the initial goal of optimising the market and providing capital.
Thinking aloud: If trades were pegged to a single time each day (per market) how would that affect the goal of supplying capital (I'm guessing it wouldn't really)? It would reduce liquidity by quantising it in step with the market but would that be harmful?
I'm sure someone will point out to me why, beyond making traders less wealthy, that's a bad idea?
I'm not arguing for or against high frequency trading, just saying that finance actually is a zero sum game unlike manufacturing.
Knight has some thoughts on systematic risk in his book Risk, Uncertainty and Profit.
I don't see how these microsecond-timing types of arbitrage can possibly help any market. Every last one of these trades will happen anyway. (*nitpicker's corner - of course some wouldn't happen, e.g. at the precise close of trading.)
Liquidity is the ability to trade large size quickly, at low cost, when you want to trade. It is the most important characteristic of well-functioning markets.
Everyone likes liquidity. Traders like liquidity because it allows them to implement their trading strategies cheaply. Exchanges like liquidity because it attracts traders to their markets. Regulators like liquidity because liquid markets are often less volatile than illiquid ones.
Market are not magical. Just because something may be fundamentally worth X does not mean you can automatically find someone to take the other side of a trade based on that valuation.
Also, you need people to want what's good for them. Suppose we need better food supplies; food production companies need more capital to optimise their production. But, people want nicer trainers (aka sneakers) and so we allocate more money there for growth to recoup more profit from that id-ish desire for fashion. That's not efficiently running the system that's efficiently recouping the greatest profit. People's desire for better food needs to be improved but instead the profit from the shoe sales feeds-back and more money is spent on advertising and marketing and enticing people to want slick shoes in preference to healthy food. The feed back loop rolls on and more resources are allocated to shoes still at the expense of other sectors.
Capitalism is not really about optimising production, IMO. The essence of capitalism is to maximise profit and the two ideals are not co-terminous.
your observation isn't something unique to finance. capitalism, or just business, is inherently competitive. guy A wants 1 widget; your factory and my factor can't both sell our widget to him. isn't that also a zero sum game?
On the face of it, there's really nothing wrong with this - too bad for you and Guy A that you don't have access to the information that I do. But I think the concern is that I can use my position to control the markets, or that everyone will lose faith in the game and stop playing.
It's actually not priceless. If the space is truly that valuable, the price will keep rising to the point where the profitability decreases relative to the risk. The risk inherent in this is also key. If you are buying and waiting for the uptick, and then it goes down...
High frequency trading is cheating. Ban it.
Or, is it the frequency that you think should be banned?
First off, high frequency traders are making their money off of how quickly they react to the market conditions. The quicker they react, the more money they make. In this sense, if they trade at high enough volume, it's worth paying more for a lower latency. This is, of course, assuming they are good at what they do. If they are bad at what they do, a lower latency wouldn't harm.
Second, they are in a competitive environment. If they want to make money off of obvious arbitrages that their competitors are likely engaged in as well (very likely in the forex market), they need to react first.
I assume that physical proximity reduces latency in ways other than the time it takes for photons to travel through fiber optic cable, for example router hops.
>> On: Trading success based on latency
In Forex (the currency exchange), there are sometimes very obvious arbitrage opportunities. You can take your Dollar, and trade it into Euros. Then, go from Euros to Yen. Then, go from Yen back to Dollar -- and end up with more dollars than you started with! Of course, after a certain amount of money flows through, the market will adjust itself and the arbitrage will vanish.
Being the first to react to this arbitrage allows you to realize and profit from the arbitrage before anybody else does.
Paying the high price ensures that their transactions don't leave the building and all of the equipment in the middle is optimised for that type of operation.
The only other solution would be 10 miles of dedicated fibre through a metropolitan area. Not a cheap solution.