A lot of people think that I hate computerized trading. That’s not actually true. I was one of the first people on the floors of the Chicago exchanges to understand what it meant, and why we needed to embrace it. It’s been an extremely painful process to see pits go away, friends lose ways of making a living and seeing the transition.
High Frequency Trading (HFT) didn’t exist in the beginning of the transition, but it dominates today. When the subject of “electronic trading” entered the lexicon of finance, no one planned for HFT. No one could envision HFT. I doubt seriously that anyone can envision where or what the next revolution of electronic trading will be.
But I do know that we can’t say that HFT is bad or good. It’s neither. It’s just HFT.
However, just like when 5000 individuals congregated together on a floor, there were good people and bad people. But, a few bad eggs were easy to discipline on a trading floor. There was a rule book that had solid pit rules written down, and there was an unspoken code of pit etiquette that you had to adhere too. If you tried to go counter culture to the ways of the floor, you wouldn’t make it. Those few bad guys couldn’t screw up the good thing on the floor.
In the HFT world, there are good guys and bad guys. The problem is, unlike the floor, a few bad guys ruin it for everyone. There is no culture of discipline or code of conduct. There are no best practices. No rules. It’s the wild west.
The wild west can be good because it brings unbridled creativity. But, the wild west can be harsh because it also has guys that wear black hats. The guys with the black hats are screwing it up for the entire industry.
The competition to drive profitability is so great, that some people can’t help themselves. It’s so easy to program an algo to front run to steal a few pennies here and there. Do it enough, you made a billion dollars.
In the pit, we had traders that ran stops. We had traders that would simply trade, try to hit stops and go the other way. There is an old comic I can’t find anymore. It’s two prisoners in a jail cell and one has his hands out explaining what he was in for. The caption of the cartoon is, “and then we ran the stops.”. In many cases, the things going on in the screen based environment bear no resemblance of an orderly market. That’s where HFT breaks “bad”.