If you read this blog regularly, you will see some blog posts devoted to high frequency trading(HFT). If you skim them, you will be left with the impression that I am against all electronic trading in the market and especially against HFT.
What’s interesting is that whenever someone in the trading community advocates against HFT, they are immediately characterized as being a member of the flat earth society. Instead of critically assessing the foibles of the current way the marketplace is structured, the advocates for HFT try and tear down the reputations of their critics. It’s bullshit and they know it.
There have been so many market disruptions across the board from electronic trading and/or from HFT that long time market watchers with a lot of experience know something is amiss. Jack Bogle was on CNBC yesterday citing HFT for a lot of the problems in the current market place. If there is a person that should be neutral to HFT, it would be a person like Bogle, who’s Vangard fund famously follows the precepts outlined in Eugene Fama’s Efficient Market Hypothesis.
Weekly, somewhere, some EFT or some stock or future has a flash crash or flash rally. The problem with electronic trading is that markets are so interconnected and algos read so many correlations that you never know which mini crash is going to be the domino that sets the whole thing on fire. This isn’t confined to geographical borders, because what happens in Asia and Europe has a direct statistical effect on what happens in the US. When the US market crapped out in May of 2010, the futures prices for other markets declined as well.
There is no way to untie the capital correlations across borders, and there isn’t a way to have the exact same regulation. It is impossible to have one international sovereign body that oversees all markets because of international competition. Who wants to give up local control of their market system? Additionally, we cannot tax our way out of the problem. Tobin or transaction taxes won’t do a thing to fix what is wrong. All they will do is add costs.