High Frequency Trading and Finance's Race To Irrelevance 382
hype7 (239530) writes 'The Harvard Business Review is running a fascinating article on how finance is increasingly abstracting itself — and the gains it makes — away from the creation of value in the real world, and how High Frequency Trading is the most extreme version of this phenomenon yet. From the article: "High frequency trading is a different phenomenon from the increasing focus on short term returns by human investors. But they're borne from a similar mindset: one in which financial returns are the priority, independent of whether they're associated with something innovative or useful in the real world. What Lewis's book demonstrated to me isn't just how "bad" HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place."'
Does it matter? (Score:3, Informative)
Of course the stock market is divorced from the real world. It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else. They don't care as long as they get their bonus.
You really think a hedge fund manager gives a crap about real-world value? The dude is making $15 million a year shuffling stocks around and skimming right off the top of everyone. He can buy a Ferrari every other week. That's your 'real world value' right there.
The elite don't care. They have burned up America, and were well paid by the taxpayers to do it. Now they are strip-mining what's left and when the country is a empty husk, ready to collapse into a third-world nation, they will get in their private jets, and fly off to their private, gated, guarded compound in Costa Rica or Belize, and live off the interest in their Bermuda bank accounts for the next 12 or 20 generations.
Asset Bubble verse Rent Seeking (Score:5, Informative)
HFT is an example of rent seeking - where somebody is able to shave some of the economic profit from an activity without doing much of anything. In the HFT case, the US Congress put in a trading rule that caused a little bit of inefficacies in the market and HFT trading ruthless exploits that imposed inefficacies. Those inefficacies will never amount to a fraction a penny per share, but do it millions of times a day..
Think of it as a 160m dollar a day tax on investors. (the number comes from Lewis's book.)
See the historical Robber Barons as an example of rent seaking.
http://en.wikipedia.org/wiki/R... [wikipedia.org]
Re:Mmhmm (Score:5, Informative)
The facts are otherwise. Based on estimates at a talk I was at recently - see the latter part of this (pdf) http://www.orie.cornell.edu/en... [cornell.edu] - traditional asset management comprises about 20% of trading volume; HFT accounts for over 30% and hedge funds for more than 25%. There may be some HFT done at hedge funds as well, but it's clear that the tail is wagging the dog.
Re:Does it matter? (Score:5, Informative)
It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else.
Actually, 45% of Americans own stock. 77% of Americans with a college degree.
But feel free to make up any numbers you need to support your conclusions.
Re:Now that Lewis's 15 minutes are up... (Score:4, Informative)
In fact, the biggest money maker for a high frequency trader *IS* front-running someone else's order. Other profits from HFT algorithms, such as simple arbitrage, are a lot lower than profits from front-running opportunities. I very much doubt that the infrastructure investments HFT firms have made would be worth doing without the front-running component, so it will be interesting to see what happens down the line.
The front-running is possible when the other person's order is placed on multiple exchanges but not delayed so it hits them all at the same time. If the order hits, say, the BATS exchange first and there is a 100ms delay before it hits, say, the NYSE, then HFT algorithms will see the order on BATS and will be able to front-run the order on the NYSE using their superior network connections to the NYSE to get ahead of the original order that is still in-transit to the NYSE.
-Matt