Cathy O’Neil: Let’s Stop Talking About HFT for a Little While

By Cathy O’Neil, a data scientist and member of the Occupy Wall Street Alternative Banking group. Cross posted from mathbabe

It’s unusual that I find myself in the position of defending Wall Street activities, but here goes.

I just don’t think HFT is that big of a deal relative to other Wall Street evils. I have written a couple of times about HFT and I’m not a huge fan, and I don’t buy the “liquidity is good and more liquidity is better” argument: at some point enough is enough. I do think that day-to-day investors have largely benefitted from it but that people whose money is in massive funds which are regularly traded have seen their money get skimmed every month. Overall it’s a smallish negative tax on the average person, I’d expect.

Here’s why HFT deserves some of our hatred: there’s way too much human resources going into this stuff and it’s embarrassing, what with the laying of cables and blasting through mountains and such. And it’s a great sociological look into the absolutely greed-led mindset of the Wall Street trader, but honestly I think we already had that. It’s really business as usual at a microscopic scale, and nobody should really be surprised to learn that people will do anything to make money that’s technically possible and technically legal, and that they will brag about how they’re making the world a better place while they do it. Same old same old.

So I’m not saying HFT is awesome and we should encourage more of it. I’m all for thinking about how to slow down trading to once a second and make it “more fair” for more players (although that’s hard to do even as a thought experiment), or taxing transaction to make things slow down by themselves, which would be easy.

But here’s the thing, it’s not some huge awful thing we should focus on, even though Michael Lewis is a really good and engaging writer.

You wanna focus on something? Let’s talk about money laundering in HSBC and now Citi that is not under control. Let’s talk about ongoing mortgage fraud and robo-signing and the ongoing bailout/ taxpayer subsidy and people still losing their homes, and the poor still being the targets of illegal and predatory loans, and Too-Big-To-Fail getting worse, and the direct line between the bailout and the broken pension promises for civil servants and the overall price list for fraud that has been built.

Let’s talk about the people who created the underlying fraud still at work in places like Bank of America, and how few masterminds have gone to jail and how the SEC and the Obama administration has made that happen through inaction and passivity and how Congress is sitting on its hands because of the money coming in from lobbyists. Let’s talk about the increasing distance between the justice system for the poor and the justice system for the rich in this country.

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  1. H. Alexander Ivey

    Call me an old fogey, but HFT is unfair. Pure and simple, unfair. And it should be stopped, simply because it is unfair. Not other argument is needed. Saying “let them do it, it only hurts other players of the markets” is like saying let a bank robber rob the bank; it IS a way for a person to get money from a bank, but it isn’t fair to the people who put money in a bank and expect to get it out again in a “fair” manner. And it isn’t a “fair” way for a person to act in a society where I want to be – able to take a gun and use violence to get what the person wants.

    Yes, there is a lot of other, really, really bad things going on in Wall Street, just to keep the focus, but that does not excuse any of it. Unfair is unfair, and it should be made illegal, and then prosecuted with due process.

    1. Dan Kervick

      Is it unfair when people engage in the other forms of old-fashioned but legal front-running?

      1. RepubAnon

        I doubt that any form of front-running is legal: they’re trading on non-public information, so it smacks of insider trading.

        As for high-frequency trading (“HFT”), the markets should welcome a government ban on this practice. Investing in the stock market these days is like playing poker with W.C. Fields:
        Question: “Isn’t poker a game of chance?”
        W.C. Fields’ answer: “Not when I play it…”

        If the game’s rigged, why play?

        1. Dan Kervick

          Isn’t much front-running based on publicly available information that some people just acquire and process faster than others? For example, if some trader has a “tell” that is public, but that only one clever person has deciphered?

    2. Banger

      I agree with Cathy–it is unfair but it isn’t high on the list of what is unfair. People who believe in the integrity of the financial markets are rightly concerned but, frankly, the financial markets are not just unfair and largely illegal in intent and in fact they are beyond reform–so the more corruption (HFT and front running clearly are corrupt) the merrier I say.

      Without effective regulation (the SEC and other gov’t watchdogs are all hopelessly corrupt and irrelevant) and the intention to enforce the laws there can be no improvement. The made-in-Wall Street candidate won in 2008 with the express purpose of extending a get-out-of-jail-free card to all major WS players. So, game over for us–it all belongs to them despite some cosmetic and minor changes that came through Dodd-Frank.

  2. Dan Kervick

    Here’s why HFT deserves some of our hatred: there’s way too much human resources going into this stuff and it’s embarrassing, what with the laying of cables and blasting through mountains and such. And it’s a great sociological look into the absolutely greed-led mindset of the Wall Street trader, but honestly I think we already had that.

    This is very much my attitude too, Yves. It seems to me that a lot of the hubbub about HFT is due to the fact that the introduction of high speed computers to an old story induces a feeling of generalized technological panic over something that is just a natural evolution of the same old Wall Street ecosystem of sharks and piranhas. If this causes people to pay more attention to the practices of the financial sector in general, great. But I think they are focusing in the wrong place if they think that HFT has introduced something qualitatively new into a system that was previously working just fine.

    Also, part of what seems to be driving this story is that when the big institutional investors find themselves paying the rents, and not just collecting them, they suddenly scream bloody murder. It is entertaining to hear their plaintive cries that the market is now “rigged” because some parasitical middle men are stepping in to prevent the big boys from getting their pounds of flesh free and clear.

    There is also no need for any political heavy lifting in this case. If the institutional investors decide they don’t like HFT, then reforms will fly through Congress faster than you can say “Jamie Robinson”.

    1. steelhead23

      HFT leads to environmental degradation! That’s rich. My amusement has to do with my Wiki-view of Mr. Marx (meaning I got all I know from Wiki). You see, way back in 1855 or so, Karl predicted that financial capitalism, with the bankers owning everything, would be the final and most perverse form of capitalism (bankers don’t produce anything, their entire income stream is stolen from labor), leading to an industrial collapse and a labor uprising. I doubt very seriously that he considered that the quest for financial profits would increase industrial production of computers, fiber-optics cable, etc. such that labor would actively contribute to its own enslavement. Hey, wait. That’s not funny. Its actually very sad.

  3. NotTimothyGeithner

    The proles are getting restless, and our elites need something to blame. Obama’s strategy of ignoring all white collar crime has created the conditions where there is no functional majority for a future bailout. 2008 was a nasty time. This time there isn’t a specter of an adult taking care of things on the horizon, and the powers that be have already crushed peaceful protests without delivering reasonable prosperity.

    HFT will be aired nonstop in a bid to distract that anger. Of course, corporate immigration and new wars haven’t caught fire with the public despite bipartisan support. I can’t imagine how they will pull off any kind of public event with the rise of the Teabaggers and Obama wrecking the D coalition.

    1. Banger

      They won’t need a bailout in my view. They will print money, so to speak indefinitely because, so far, they have been able to do so. I believe the oligarchs are in a solid position at the moment through new global mechanisms (mainly secret) that come from a general agreement on how to handle financial crises starting with plunge protection funds and schemes enforced, in my view, by a system of interlocking agreements nearly everyone agrees to. What remains to be seen is if everyone will continue to play by these rules. BTW, this is sheer speculation on my part. I try to figure out what sorts of recommendations I would make if I were advising the oligarchs. I have said for some time that the system now in place is fairly robust with a network of largely secret agreements among international orgs, sovereign states, and big players on Wall Street and the City that allows them the ability to loot within reason. My guess, is that this is ultimately backed up by the threat of violence.

      1. NotTimothyGeithner

        They will need a bailout. Their greed knows no bounds. Whether it’s big insurance, pharma, wal-mart, or a random bank, an entity in TBTF will fail because of incompetence. They can print money until they destroy the consumer through inflation, and they will still demand a bailout. Lehman failed because people couldn’t make t heir mortgage payments. Parasites die with the host.

      2. DolleyMadison

        Yes. But how long will their minions follow orders against their fellow citizens? The BLM backing down at the Bundy Ranch seems to show a lack of appetite for crossing that line…(I hope).
        I’m sure heard that Family Dollar – serving the poorest of the poor – is struggling. Yet another harbinger…

        1. NotTimothyGeithner

          Fees and consumption taxes pay for the police, courts, prisons, transit, etc. The Hamptons might be under control, but the Boston lock down was shutdown due to lack of personal and supplies despite the police dealing with a compliant population. How long would it have lasted if people didn’t follow the curfew?

          1. James Levy

            I think you hit on something there–fear is the key. The curfew will last so long as we are afraid to go out. And at least some of the police won’t enforce such draconian measures if they can’t justify it in their heads without fear. Information will be the second issue. The government response to an economic disaster will be 1) shut down the internet, 2) text everyone telling them to get home and stay there, 3) close down the cell system. I think the land lines will take longer to cut, so if you see trouble brewing, get yourself to a copper connection because they may be the last to go. The media will fall in line pronto, and those that don’t won’t last 24 hours before compliance is forced. And lie, lie, lie.

            Stephen King pretty much nailed this, although at an earlier stage of technological development, in The Stand. Expect the Deep State to enjoy lining up and shooting some troublemakers while they have the chance.

            1. rob

              On that note*
              “robin sage” is began again in north Carolina.This is an “exercise”, they have been running every year out of fort bragg for years now.
              In it ,soldiers don street clothes and “pretend” to take over civilian areas.
              @ five years ago, two soldiers were killed when an orange county sheriff, who wasn’t in on the “games”, confronted two armed men and ended up shooting them.The two men being soldiers from fort bragg…
              People, civil discord has already been “gamed”….
              What constitution….. we don’t need no stinkin’ constitution….

  4. Sufferin'Succotash

    The problem with “gotcha” type muckraking like the HFT story is that it doesn’t really educate the public. It just winds up being more entertainment, something sandwiched between fatal bus crashes in CA and Malaysian airliners at the bottom of the Indian Ocean. There’s no royal road to raising public consciousness other than repeating the sort of narrative outlined by Cathy O’Neil. Of course it’ll take about 30 years to achieve any results with that approach. Too bad it wasn’t started 30 years ago…

  5. jfleni

    RE HFT: Cathy is exactly right; we need a sense of proportion.

    The caterwauling about HFT is beginning to sound like complaints that Hitler and Stalin and Ghengis Khan all picked their noses!

    1. Lord Koos

      The HFT thing will be used as a fig leaf for all the other stuff that is wrong. They’ll ban or tightly control HFT and tell the public everything is fine now, it’s OK to get back in the markets, etc.

  6. Christopher Dale Rogers

    Probably right, Obama’s probably waiting for something to drop in the USA so that he can use his drones to kill off any dissent, the Middle East and Pakistan being a good training ground from this type of class warfare.

    Just hope the underground hacking community knows how to disarm Obama’s drones, otherwise all hello we let loose.

    1. James Levy

      I think that America is dominated by people who think that “business as usual” will continue indefinitely, that they are the “deciders”, the “masters of the universe”, that they’ve got this all under control and can pull whatever strings are necessary to keep the system more or less intact and themselves in the driver’s seat. This delusional sense of domination and control is why I can’t subscribe to Banger’s ideas about the stability of the system. Arrogance breeds nemesis, and our “betters” are among the most arrogant rulers in history.

  7. washunate

    This is a thought-provoking piece, and I agree prioritization is a skill set that could use improvement. My unsolicited two cents :)

    We seem to run off in all sorts of directions chasing symptoms, rather than causes, of our societal disease. I don’t think HFT is the exception. This appears to be how many topics are framed, as if there’s something unique about the particular problem being discussed rather than the real story being the common nature of the problem of mismanagement. From financial fraud to unemployment to trade imbalances to environmental degradation to identity politics to fill in the blank, the underlying issue is the widespread assault on Constitutional governance and rule of law and transparency and so forth that is required to have a functioning market-based federal republic wherein life, liberty, and pursuit of happiness are self-evident rights.

    This is why I think simplicity is such a critical component of effective public policy in a large society. Grand ideas drawn up on paper depend upon actual management to implement and sustain. The more nooks and crannies and exceptions and unintended consequences, the more room for the psychopaths to exploit.

    1. Sufferin'Succotash

      Another term for “simplicity” is a convincing narrative. For one model of how this can done, I’ve gone back to re-reading Herbert Croly’s “Promise of American Life”(1909), which I originally plowed through in an undergraduate course in US history more years ago than I care to remember. Croly’s been in the doghouse in recent decades because some aspects of his “new nationalism” eventually began to resemble Mussolini’s, but “Promise” still provides a first-rate example of how to present a progressive agenda.

  8. DolleyMadison

    Amen sister! Funny how stealing houses from the poor is a yawner no one wants to talk about or prosecute, but fact cats cheating other fat cats (a la Madoff) warrants much moaning, wailing and handwringing.

    1. allcoppedout

      Spot on Dolley. Though we are all victims of the fat cats as we aren’t getting productive investment to protect our homes.

    1. susan the other

      Yes and not just in the US but globally. They tried to do this with commodities 4 or 5 years ago and backed off a bit because of the depression. But now food is all that is left. Unless we change the profit-at-all-cost contradiction. And Cathy is right to keep the fraud and theft front and center because if we do not they certainly will not.

      1. allcoppedout

        This is only something I feel in my bones. The technology used in HFT might have applications against the current crookery such as starburst money transactions.

  9. impermanance

    The conversation need not go further than people’s dependency on this something-for-nothing society. Wall Street is simply the most pathological form of this cancer, but it is omnipresent, just the same, and is the basis of our entire socio-economic system.

  10. Patricia Marino

    Amen! In general, I’ve been fascinated how often the concept of “fairness” comes up in HFT discussion. When fairness and justice come up in broader social issues, it’s commonly heard that fairness and justice are “artificial virtues,” too vague to be of use, and that it’s because of this we have to use efficiency and Pareto optimality instead. Then you get into a discussion like this and suddenly – boom! – fairness is all the rage.

    1. Dan Kervick

      And the people upset are the big institutional investors who are tying to kill social security and shove the retirement system into the unstable stock market.

  11. MichaelC

    I suspect Lewis’ book signals we’ve reached peak HFT.

    Goldman is rumored to be closing their Dark pool SigmaX and the SEC is making noises about passing a rule to force trading back to the exchanges.

    The easy money in the HFT space exploits the HFT/Dark pool arbitrage. No dark pool (or a shallower one) kills the arb. Game over.

    Stay calm and see who follows Goldman out the door is my plan.

    1. Anon

      ABSOLUTELY CORRECT! As if Virtu Financial actually considering a public offering wasn’t enough…

      …but HFT actually covers a range of activities, not just the front running scheme Lewis details. A lot of the others (IMHO especially stop runs) hurt all investors and there has been precious little discussion devoted to these, arguably more destructive practices. I very much agree with O’Neil about the misallocation of attention and capital, but I think that it is a mistake to downplay the perniciousness of HFT writ large. IEX is nifty, but it doesn’t solve all the problems.

      All that said, I think that the recent controversy will excuse market turbulence going forward in popular culture. Totemic appeals to “confidence” will justify whatever happens, and any instrument commentators can latch on to sagely profess their foreknowledge will prosper. Medially interested audiences will accept the argument for its facility, and some blunt legislation *might* be passed to address it while the more material techniques persist.

      I know I’m preaching to the choir, but we need a smart, tough SEC. Easiest answer? Apply the “war on drugs'” (as ludicrous as malapropisms come) civil asset forfeiture systems to the SEC AND SEC enforcement actions, and make the process maximally transparent post conviction to avoid abuses. Allow criminals, including criminal LEOs and prosecutors, to be impoverished and socially excluded for their conduct.

      Sorry for the rant.

  12. Reify

    Having personally lost about 20% of my portfolio value in a matter of minutes on a single day when triple the volume was sold at the close, (or Head Fake sold), I think HFT is a bona fide evil and, of course, a form of front running. If it turns out that it was also used to prop up the market after Lehman imploded or that it has been a means of suppressing this or that commodity/real asset
    maybe more people will go Hmmm…

    I am a bit cynical about the premise of an article the title of which contains a presupposed (embedded) divide and conquer suggestion. It is like saying, well, they haven’t killed us with lasers that much so we shouldn’t pay too much attention to that. Let’s focus on bombs and bludgeons,-they’re worse. My view is that whatever can serve to awaken us to the criminal culture- HFT, or Blythe Masters’ bloomers being investigated, let’s have it. If it is straightforward enough to be presented in 3 bullet points, even better yet. The faster it can become a feature film the faster it can become part of the cultural awareness.

    1. Mark P

      ‘…if it was also used to prop up the market after Lehman imploded’

      It was. Basic analysis of charts and numbers from the period points to that pretty strongly.

      Equally clearly, however, no actual conspiracy might have been necessary for that situation to emerge. Rather, in the 2008 crash’s immediate wake, HFT activity was the only thing providing a Potemkin-like simulation of a functioning market, and a ‘gentleman’s understanding’ would inevitably have emerged between the TBTFs with proprietary trading desks and the Washington pols to keep that situation running as long they had to.

  13. Reify

    By the way, I drive an 18 year old car, rent, and am of pretty modest means. Not a fat cat.

    MAYBE THE FAT CATS ARE USING HFT. Technology at the service of wealth? Possible?

    Who’s to say that if Mr or Ms. Fat Cat wants to place an order for a large position his/her personal broker, with access to HFT, wouldn’t “clear the stops” to trigger a bunch of sell orders among the small fry so that the large and privileged client gets what they want without having to raise their price.

    This is a bit off topic but remember, when MFGlobal blew up, the KOCH Brothers and others somehow knew to get their funds out beforehand but the farmers who had hedged their
    “seed money” were caught in the fray. And Jon Corzine is still not in jail.

  14. scraping_by

    While the broad trend of the article is accurate, we in the real world might be able to get some good out of the uproar.

    Currently, Holder’s legal theory of financial crime is an extension of the theory of corporations. Where the people who run corporations are protected from certain civil actions, especially the liability for debt. Holder’s extended that protection from civil law to criminal law. Stated baldly it’s obvious bullshit, but that’s another discussion.

    The current uprising against electronic frontrunning, fake out cancelled orders, algorithmic insider rings, and all the rest, is a reaction to the sort of overreach that wakes up large numbers of citizens. Watching the painful justifications for giving criminals a pass in exchange for a small cut of their loot won’t work as popular entertainment. And it would be lame to argue the HFT houses are too impotent to prosecute.

    This may be looking for keys under a lamppost, but it’s the game we’ve got.

  15. Jackrabbit

    scaping_by is on the right track.

    People connect with issues in different ways. For many, the unfairness of HFT hits home and can lead to larger discussions of how markets and politics are corrupted by cronys and collusion.

    I often feel that those who care enough to blog and read/comment are something of an echo chamber. Y’all (not everyone, but many) don’t realize that the major-domo concern of the politicians is covering up for all this crap so as to tamp down popular discontent. Well this is an issue that feels more real and is more accessible to many people. So no, lets not stop talking about it, lets talk MORE about it! Lets link it to larger issues instead of treating it as an isolated issue.

    For example:
    Why did regulators allow this to go on for so long? What other markets have been blatantly and illegally manipulated? Why do firms only get a speeding ticket? Why are complaints ignored? and whistle-blowers hounded? How does this relate to political contributions? How is language used to manipulate us to accept a radical neolib/neocon agenda (what do terms like ‘freedom’ and ‘free markets’ mean today)? What is a ‘self-licking ice-cream cone’ and ‘circle-jerk’? etc.

  16. ian

    You don’t get to pick and choose which issue will strike a nerve with the public. All you can do is participate while people are interested in the subject (and it is a given that in a week or so, they won’t be any more).
    There are some problems with HFT and whether you think it is the biggest issue out there, a public discussion has been started. If you think there are bigger issues out there, feel free to write a book that engages people, like Lewis’ did.

    1. Lambert Strether

      Huh? We most certainly do get to pick and choose. That’s what having a blog is all about: Affecting the discourse. Or would you rather we left that pleasant duty up to our betters? Oh, and clue stick: Yves actually did write a book. Have you looked at the sidebar?

      1. jonboinAR

        The poster you responded to said:
        “You don’t get to pick and choose ,which issue will strike a nerve with the public.”

        You misunderstood the statement. You bring up hundreds of issues, and I love you for it. Only 1 or 2 make Sixty Minutes. The poster’s saying we need, for tactical reasons, to jump all over those whether or not they are THE most central.

  17. Nathanael

    HFT is front-running, which is illegal.

    This makes it a good example of the kind of stuff which is going on, such as failing to record mortgages or fraudulently charging fees which are not in people’s contracts, both of which are also illegal.

    The point is that Wall Street is just doing blatantly illegal stuff and getting away with it, and if people recognize that, we’ll start making progress.

  18. ChrisM

    I’m shocked this story saw the light of day on this site.

    1. HFT traders create trade entries they have no intention of honoring (a violation of SEC rules).

    2. The HFT traders could not back up all their trades since they don’t have the money to do so. (which is fraudulent & a violation of SEC rules)

    3. Human traders cannot respond to HFT trades given the physical response times

    4. As a consequence, an HFT trade offer is significantly different than a “human” trade offer

    Therefore, HFT trades are adversely affecting the market. Is this rocket science?

    Why is this site publishing stories that HFT trades are not a serious problem?

    1. Yves Smith Post author

      It looks like you did not read the post.

      Can you not comprehend that even though this activity is illegal by any reading of the SEC regs (a point we’ve been making for years) there are abuses of far greater consequence that haven’t gotten remotely the attention that HFT has?

      1. ChrisM

        I’ve replied elsewhere in this post, but my basic point is attack where they are weak. HFT is (IMO) an indefensible weakness, so that is where the attack should be made. Pragmatism. Until we see convictions we should be going after easy targets.

        1. Yves Smith Post author

          You are asking the SEC, which is widely seen as the weakest regulator in all of DC (and I don’t mean weakest financial regulator, I mean weakest regulator) to attack when they approved of this behavior. Please tell me how likely it is for an agency to reverse itself and repudiate its prior decisions?

          And the SEC cannot launch prosecutions. It needs to enlist the Department of Justice to do that.

          Now having said that, the FBI is investigating, but in the mortgage crisis, the FBI went only after small fry. I’d expect to see that pattern again.

  19. ChrisM

    In other words, this article is of the form “are you upset about A? Well, you should *really* be upset about B”

    Again, I’m extremely disappointed anyone here thought this was worth publishing.

    PS – for those too dense to understand, in the example I posit, both A & B get prosecuted. Instead we see a misdirection to deflect the A behavior.

    1. Yves Smith Post author

      Please read another blog. No one is holding a gun to your head to read NC. And as you can see from comments, the overwhelming majority of readers disagree with you resoundingly. We seldom get so many positive reactions to a post.

      1. ChrisM

        “And as you can see from comments, the overwhelming majority of readers disagree with you resoundingly. We seldom get so many positive reactions to a post.”

        I see (well, not really since I don’t see much in the comments). Are we devolving to Plato’s democratic majority?

  20. ChrisM

    In other words, this should be the easiest, lowest hanging fruit to destroy, and yet here we have some weird post about how we should ignore it all since there are “more important” targets.

    Why not have a post about how to organize to destroy HFT once and for all?

  21. ChrisM

    Sorry, Yves, I posted before I saw your comments. I really don’t understand your point. I’ve read your posts since 2008 (or earlier) and am a firm supporter. This one, though, I don’t understand.

    HFT is an easy target. Why not hit it hard?

    Now, when the time is right?

    If instead one decided to put off attacking HFT for other, more lucrative targets, HFT still remains.

    Where are the victories? Why not attack HFT if it is such an easy target?

    I have my doubts; I think any attack on HFT would be met with significant resistance.

    1. allcoppedout

      I’m not sure what the real situation on HFT is Chris. I’m pretty sure a ‘jury of us’ left to decide whether it was legal or not would conclude it ain’t – but we don’t get choices like that and the whole financial shebang is riddled with law we would consider unfair. Cathy is a bit like a colleague telling me to lay off the drug-dealing small fry so we can get the bigger fish. I can sympathise with your point (even if the post is saying something else) because (as a long-ex-cop) I’d want to nick the HFT scum to sweat them to give up those further up the food chain.

      Crooks that we can turn often provide good security information. I suspect the regulators are running short of a Bill Black, several hundred lawyers and 5000 pairs of boots like mine. So, as Cathy is saying, there ate things to prioritise. I thought you got it wrong, but big deal mate, there are few enough of us already to fall out over such.

    2. Yves Smith Post author

      I have said for years HFT should be subject to a transaction tax. Dean Baker has an is again.

      That is getting no traction.

      Michael Lewis has managed to make this a hot topic and simultaneously insist that the solution is a market solution, as in IEX. Lewis is firmly opposed to regulatory intervention.

      It is pointless to try to compete with Lewis in the noisemaking category.

  22. Fíréan

    The woman seems to not be aware of the far reaching conseqences and influencies of HFT ( high frequency trading) in the securities, bonds and forex markets upon the lives of regular people. The markets do not function in an isolated environment whereby the gains and losses are only those of the so called” fat cats”, as suggested in a previous comment.

    Fortunatley there are enough people to focus attention on all the important matters ( some singularly with a wide focus of attention) and i would not attempt to deter anyone from focusing on this particular subject.

    1. Yves Smith Post author

      Forex is not regulated. You might get dealers on fraud, but the bar would be a lot higher than in equity markets, which are exchanges. Bonds would only be Treasuries, corporates don’t trade with remotely enough frequency to be HFT candidates.

  23. Jackrabbit

    HFT + Kidney is absolutely damning.

    And that leads naturally into further discussion of other fixed markets and regulatory lapses => FIRE extraction => political manipulation => back to regulatory lapses and FIRE extraction.

  24. Ramon Creager

    Yes, I year you. But here’s the thing: HFT is something nearly everyone can hate. It skims money off the top, enriching the few while providing no value to society. There is no morality play that can be deployed in its defence (say as with foreclosures: lazy profligates living beyond their means, yadda yadda.) It is emblematic of everything that is wrong with Wall Street. It is low-hanging fruit, in other words.

    And yet, there it hangs, unplucked. We haven’t been able to do anything about it. Wall Street has easily defended it. They haven’t even broken a sweat doing so. And you think we should be focusing on the harder to reach fruit further up the tree? Given our complete impotence in curbing HFT, how’s that gonna work out?

  25. John Bennett

    I write from the viewpoint of Michael Lewis who reports on one successful response to HFT–create a competitive stock exchange with the latest speediest operation. That seems to me to be a significant improvement in how the market works. With it should come a decline in the marginal cost of trading and deliver greater competition in the market while offering no possible advantage to anyone else trading in that market.
    Yves may be right that there are worse causes of market failure around. What would she suggest doing about them?

    1. Lord Koos

      Technically speaking, the new exchange you mention, is actually slower, not faster. That is how it manages to nullify the effect of HFT.

  26. PaulArt

    I actually welcome as much HFT as there can be. I in fact welcome all kinds of unfair practices. I wish most of the SEC, CFTC, FDIC bla bla top brass get run over by buses so that the money changers can run wild for half a year. All this will only do the American people a whole lot of good when the next crash is accelerated ASAP. The 1930s generation knew the worth of financial regulation and recognized what Pecora was doing because they ALL lost big time. All those investing housewives clubs etc etc. They all had egg on their faces when they learnt that all the snakes in the grass who led them on the ride up got out well in time due to inside information. The current generation of baby boomers are just as clueless as those housewives investing clubs. There is nothing like a $200,000 nest egg going down the tubes. Its the best motivator for people to take some time and learn something. Last week I was sitting across a diner table from another one of these milquetoast middle-wayers who is a libertarian and he told me that his 401K went up 14% in 2013. This is how these people are. Clueless. I told him that the stock market was in the biggest bubble ever known and that the dollar was at a historic high and is due for a massive correction in the next 10 years. Don’t know if I got through though.

  27. JustAnObserver

    Department of Small Mercies #1: Just think all those ultra-geeks wearing their fingers to the bone & beyond trying to get the HFT reaction times down to the picosecond level *could* have ended up working for the NSA/GCHQ where they would be doing real harm.

  28. jb


    Agreed that we should stop talking about HFT, for the simple reason what little can be done to reign in the abuses will be far less than the predatory behaviors they can do 24/7 in the financial markets.

    HFT’s predatory behaviors can take the SP500 down lock limit (-5%) in a matter of milliseconds, and seconds later be back up +2%-4% as happened when Boehner said no plan B on Dec 21 2012 at 715 pm CT. It looks like a blip on the daily charts, as if it was just another one of those move along folks nothing to see here events.

    Similar flash crashes are happening across the spectrum of other financial markets, taking them up or down 1% to 2% at will anytime anywhere every few weeks or every few months.

    HFT aggressive behaviors are truly the reminiscent of the lawless wild west. An no sheriff or texas ranger is ever going to be able to reign kind of stuff in. So, might as well let dead dogs lie, and move on.

  29. readerOfTeaLeaves

    First, apologies for not reading all the other comments before leaving one myself – something I try *very* hard never to do.

    With that said, HFT matters plenty because it strikes right at the heart of the whole nonsense about markets being able to locate value via pricing. This is the death of pricing. How the Glenn Hubbards of the world can defend this nefarious gamesmanship is beyond me, and if they try then they expose themselves as ludicrous shills. (Again.)

    But when making money is as simple as ‘my algorithm is faster/better than your algorithm’, irrespective of how well companies are run, whether products are reliable, etc, etc, we are in economic La-La-Land.

    HFT is a symptom, just as fraud closure and Abacus and Timberwolf are symptoms, of a system going off the rails. It is destroying value while skimming off money, damaging the entire integrity of the system.

    It’s not cancer; it’s closer to typhoid or dysentery.

  30. Reify

    We CAN do something about it…a one cent per transaction tax, ear marked to the fraud buster
    Agency or program of Occupy Wall Street’s choice, would shut HFT down.
    50,000 Head Fake Trades in 10milliseconds…$500, repeated how many times per times per day…

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