Just so you guys know, there's actually nothing economically inefficient with what these high frequency algorithmic traders are doing.<p>With the example they gave, the buyer was WILLING to pay up to 26.40. This means, in the buyer's opinion, the stock is worth $26.40 per share. The sellers were willing to sell for anything above 26.10, which was the ask price. As basic economics teaches us, them trading for ANY amount between these two prices is 100% efficient. And, in this case, it doesn't matter who gets the extra money, whether that be the seller, the buyer, or the high frequency trader.<p>The trader is doing nothing to hurt the liquidity of the market - they are not 'gaming' the system in any way, nothing and nobody is being 'manipulated'. The seller sold for a price that they thought was a fair value, and the buyer bought for a price that they thought was a fair value. The traders are simply looking to make that 30 cent difference. Although it seems like they are contributing nothing, it is still economically efficient.
If you plop a big limit buy order at $26.40 and the market's at $26.20, you will wind up paying close to $26.40 because you'll eat through all the sell offers and transact inefficiently. It's called slippage.<p>However, what's preventing you from getting f<i></i>*ed is that this is a market, so basically you have 10+ HF shops fighting who can be on the other side of that slippage. The fact that it's a competitive market ensures you don't get raped like the guy claims.
Can I just point out --- knowing full well that this is not a meaningful or valid argument or constructive comment on the article --- that Karl Denninger is a huge, notorious Internet crank? He's burned a whole through operating system teams, ISP markets, the security community, at least two major world religions, the SCUBA industry, and now this. He has a bias here, and it's towards controversy he can be self-righteous about.<p>He may actually be right about this --- he is occasionally right --- but man I wish there was a credible source that backed him up.
I think this characterization of HFT is a bit overblown. The activity he's calling unethical--offering a security at price, getting hit at that price and continuing to raise your price until you stop getting hit--is exactly what market makers have always done. This is basic free market dynamics. You offer at $100, you get hit, you raise your price a little bit, say $100.05, and see if you get hit again. Don't get hit? Ok, drop your price back down a little. The same thing happens in open pit trading, it's just a lot slower.
Here's a good thread over at New Mogul on the subject. This type of trading is not illegal, and it's actually commonplace among the big players on Wall Street.<p><a href="http://newmogul.com/item?id=14134" rel="nofollow">http://newmogul.com/item?id=14134</a>
The 'price limit' phrase reminded me of the traditional fish selling method called 'lota' in my corner of Europe.<p>It goes like this: the fishing boats come in, crates of fresh fish are brought to a market area where buyers await. For each crate, the announcer starts with a high price (say 100) and counts rapidly down ("99, 98, 97 ...") until one of the buyers shouts out "Soo" to buy the crate at that price.<p>Not as amusing as bidding up an auction, but this seems a time-efficient method for finding the buyer's price limit - after all, the fish is not getting any fresher sitting there ...
From the article:<p><i>"If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know."</i><p>But from this article at Bronte Capital (via New Mogul):<p><i>"Anyway if 10 percent of global stock volume provides 220 million dollars revenue per quarter then there is no way that a substantial proportion of Goldman’s trading profit can come from high frequency trading. The numbers do not work."</i><p>(<a href="http://brontecapital.blogspot.com/2009/07/high-frequency-traders-phoney.html" rel="nofollow">http://brontecapital.blogspot.com/2009/07/high-frequency-tra...</a>)
John Hempton thinks it's impossible for this to amount to $22billion/yr - <a href="http://brontecapital.blogspot.com/2009/07/high-frequency-traders-phoney.html" rel="nofollow">http://brontecapital.blogspot.com/2009/07/high-frequency-tra...</a><p>He's not a crank.
This sounds like the kind of story Technologists love.<p>Machines at better are stock market trading, so the humans are being replaced in this industry.
When the average investors leave the market because of this, front running (<a href="http://en.wikipedia.org/wiki/Front_running" rel="nofollow">http://en.wikipedia.org/wiki/Front_running</a>), , and the fact that small number of firms (~400) is involved in 70% of the US trading volume (<a href="http://www.ft.com/cms/s/0/a5f03366-6d69-11de-8b19-00144feabdc0.html" rel="nofollow">http://www.ft.com/cms/s/0/a5f03366-6d69-11de-8b19-00144feabd...</a>), will they ever come back?