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High Frequency Trading and Technical Volatility

Thursday, May 6th should go down as a breakdown of our market system.  Six stocks traded at a zero dollar price.  Bid/ask spreads blew out across the board and many options that traded at $.15 spreads were $4 or more as market makers backed away, not knowing what was going on.  I have reports that many trading floors halted trading as they could not explain such a massive spike and vehement selling.  The problem is that hedge funds and banks have sold themselves as “market makers”.  No longer are there people on a floor exchanging trades with known sources, now there are just billions of orders being placed by computers in fractions of a second.  Over 60% of the trading volume is now done by autonomous computers.  Some of these algorithms are trying to make a fraction of a penny here and there, others are written to follow the momentum and push markets further under a snow-ball effect.  I think Dylan Ratigan is more right than wrong, this predatory trading is destructive to our society.  It is fine to make bets within the markets based upon economic views, but it is not alright for markets to be dislocated in such a way that they dictate economics.  Our bond and equity markets are there to serve a simple purpose: to provide capital for productive investments.

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4 Responses

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  1. Filiberto Rodriguez says

    Surly, I couldn’t agree more. We have a Quant Fund problem, some people won’t agree with this, but at the end the problem exist. The same traders (hedge fund, Banks, and Quant funds) that make this rally happend, were the same that make this crash. To blame a trader from Citi trading desk of an error by hiting a B instead of an M, its foolish. At the end, the trading operations made on a mathematical model will work for a moment, but the end result will be the same. Trading base in a math model will work some day when the model can predict how we humans bevahe in every moment.

    As I said, for a good hint look at the USDJPY, and ask your self why the USDJPY crash befor the market crash…

  2. bgreen says

    no-one seems to be asking the basic question of what is the stock market for?

    1. to pool capital to invest in companies (hopefully generating a return on the investment)
    2. price discovery

    the SEC’s job is to ask itself, how does each new development (HFT, derivatives etc) facilitate these objectives?
    HFT – has driven capital from the markets and obscures price discovery ergo NO.
    securitization – drew in capital, obscured price discovery (due to ratings fraud). solve the ratings problem and it works.
    rating agencies – aided capital formation, obscured price.

    small business (the dynamic of any economy) has been seriously damaged by the artificial redirection of capital. it will come back and fill the vacuum but this time it will take much longer as capital will need to come from profit and not external investors. thus employment cannot pick up at a meaningful rate.

Continuing the Discussion

  1. Market Crash and Rebound: HFT Problems, Audio of Crash, Where Things Stand, David Kotok and Art Cashin, Paul Kedrosky, Mark Cuban, Kid Dynamite, 60% Robots | N2PQ Mortgage News and Information Network linked to this post on May 11, 2010

    […] volume is now done by autonomous computers. … – also has Dylan Ratigan and Jon Najarian video – Surly Trader Post Published: 11 May 2010 Author: Jeffrey Lee Nelson Found in section: […]

  2. The Positive Feedback Loop | SurlyTrader linked to this post on September 8, 2011

    […] death spirals.  In the crisis of 2008 and the flash crash of 2010, high frequency trading was blamed as reason for market volatility.  In a way that is true, when high frequency trading computers sense massively dislocating markets […]



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