3 Responses to “October 12, 2016”

1. malcolmm says:

   October 13, 2016 at 6:42 pm

   All this technology and effort towards something that results in nothing useful being created.

   I suppose it could be argued that high speed trading improves market liquidity but I would think there is enough of that in currencies.

   I’m not arguing against it because it unfairly takes advantage of other traders – that is capitalism. If all these high speed trading companies vanished off the face of the earth tomorrow there wouldn’t be the slightest negative effect.

2. jiHymas says:

   October 13, 2016 at 10:09 pm

   I disagree that there is “nothing useful being created.”

   Bid-Ask spreads have declined since the advent of high speed trading and this is very much to the advantage of retail traders (whether spreads for big traders have declined is a more controversial matter). This reduction in costs has come from:
   – retail investors having lower transaction costs
   – high speed traders making more profit
   – traditional market makers making much less profit.

   Overall, profits to market makers have declined; this reduction in trading friction is a Good Thing.

   Besides the direct effect of reduced transaction costs, there are indirect costs as well. I will suggest that you would be much less likely to invest in preferred shares if the bid-ask spread was routinely $10, and more likely to invest if $0.01 was the normal figure. Greater participation in the markets is a Good Thing.

   I will agree that a case could be made that too much effort and money is being expended for too little result, but that’s a different thing from ‘nothing useful’.

   And I believe we are agreed with the point I have made many times on this blog, that the purpose of capital markets is to transfer capital from savers to investments and that all regulation should explicitly focus on facilitating this goal.

3. nebulousanalyst says:

   October 14, 2016 at 12:58 pm

   Have to say I agree with you James. It has never been cheaper to trade retail and that is due to tighter spreads and the fact that brokers can give low commissions when they just sell off their flow.

   If you take a look at the pref market books, you’ll realize that the spreads have decreased substantially in the last 6 years and its almost all algorithmic. If the algo’s disappeared tomorrow you’d be hard pressed to find prefs with spreads under 0.30 or where you could buy 2000 without paying up 0.50. If algo market makers vanished tomorrow, the capital markets would barely function – all the manual capacity to manage markets has been culled – there would be 0 liquidity.

   ‘High speed trading’ as a catch all evil is just overdone – the loudest voices have always been the broker dealer / market maker segment that got squeezed out – but this is just a wealth transfer from one institutional trader to another. Sell side desks that used to have 20-30 traders now have 2 that put 90%+ of their flow into algos. A large amount of the high speed algo trading volume is orders being worked for institutional flow (pensions etc).

   The effort in currencies is sort of a different case to most markets – Malcolmm you are right that there’s lots of liquidity there (most of the time) but it is in OTC type venues with elective liquidity (my prime elected to turn off client access around Brexit). As there are numerous venues, the fastest HFTs actually have true arbitrages to catch (and technically do provide added liquidity and efficiency as a byproduct).

   The majority of effort and research focus is in the ‘quantitative’ trading space, which can be on numerous time frames, typically focused on asset management and risk management. The goal is return profiles that are smoother than more traditional methodologies. High speed matters even for longer term quants -> for hedging and adapting to the market – and for data processing and modelling. I think it is reasonable for capital to be spent on this rapidly growing segment – its goal is ultimately ‘higher quality’ returns (I know that’s a loaded statement) that will benefit institutional investors (pensions) which ultimately benefits retirees.