In my first post on high frequency trading, I ended with a somewhat tongue-in-cheek proposal for a High-Frequency Arms Limitation Treaty, or HALT. The more I observe of the concern for this strategy, the more pervasive it becomes, and the more apparent abuses that come to the fore, the more this proposal moves from the realm of satire to the real.
As I mentioned in that post, I do not think the market benefits from moving trading speeds faster and faster in the millisecond range. But what the need for speed does do is burn through untold hundreds of millions of dollars for all the competitors to keep up with one another. And just as the complexity of derivatives can lead to the obfuscation of non-economic or manipulative operations, so can operations that blur past the screen before anyone can observe what is happening.
Here are some questions regulators should ask -- maybe they already are asking them -- to see if HALT makes sense:
What is the economic benefit of trading with twenty millisecond latency versus thirty millisecond latency?
What is the economic cost and what are the barriers to entry erected by pushing the latency envelope?
What speed of trading leads the marginal costs of obfuscation to dominate the marginal benefit for the end investor? By obfuscation, I mean the creation of a cloud around the trading activity that prevents the regulators from being able to assure the investors are being protected and the market is operating transparently and fairly.
What level of trades per second becomes problematic in terms of obfuscation versus practical and economic value? The focus with high frequency trading is the latency, but focus also should be given to the number of trades done per second. It is not just a matter of speed of trading, it is the cloud of noise that comes from what can be hundreds of different trades on one security all flowing from one trading firm into the market in a very short time period.
The answer to these question might be limits on the latency of trades and the number of trades per second allowed in any one security by private and proprietary trading firms.
"A Demon Of Our Own Design"
"The End Of Theory"Suggested Post
Popular Posts
-
Some of the dominant policy issues of today – immigration, energy, the emergence of China – have their analogues in the great Industrial R... -
The recent scandal has brought a spotlight on the long-term issues of unfair college admissions,. Once you get past the outright criminali... -
What is wrong with passive investing and index hugging? One problem is that these strategies often use ETFs. I wrote about the potential ... -
In case you haven't noticed -- and I haven't -- we apparently are in a world of exceptionally low risk. To see this you need look n... -
I'm not going to write anything here about the huge drop in bitcoin over the last few days, so what I am writing cannot be ignored shou...