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freemarkets, arms race & High Frequency Trading.

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passsingbird posted on Mon, Jul 9 2012 6:20 AM

competition is good, but what if it creates an arms race, where both parties have to run twice as faster to stay at the same place !

Take the case of HFT (High Frequency Trading), people spend billions of $$$ just to shave off few milli seconds. 

Do you guys think this armsrace in HFT is  productive and adds value or

it has completely lost the sight of its core mission (i.e contribute to price efficiency) and has become 'beat the other guy faster game'. !?

Do you guys think there is some need to cut down competition (eg: regulating certain kind of predatory algorithms or adding a penalty for faster executions so the incentive for HFT drops)?

or could the following be a proper reply :

"hey its freemarket and freedom to trade, if you can't keep up with technology/competition find another job" !


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Are you trolling or are you serious?

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am serious !

what makes you think am trolling !?

The question came after watching that video.

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If you spend some time on this site, you'll see that we don't exactly consider the marketplace that currently exists in the U.S. a "free" one, and so it's impossible at this point to tell if these are actually productive, profitable actions, or just the result of new money continuously entering the system, creating price instability (or something else entirely; I'm no expert on this subject).

That said, if in a free-market, utilizing these algorithms to make these trades just a few seconds earlier were profitable enough to justify investments in these super-computers and whatnot, it's because the "market" places a high value on these functions in the first place.

I recommend this essay to explain what profits indicate, if you're still skeptical. Otherwise, maybe JJ will pop in here and give you a few articles (that's your que, J!)

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Bogart replied on Mon, Jul 9 2012 12:50 PM

In a truely free market for trading financial instruments the question of value of HFT would not be relevant as the practicioners would either profit from the activity by staisfying their clients or go out of business.  In a truely free market, arbitriage would not be possible in the longer run, of course in the short runs anything can happen, so the ability of these traders to profit would be limited to their abilities.

In the super-regulated markets of today where long term arbitriage, think being able to loan money from the central bank at artificially low interest rates or being able to buy assets and then sell them to the central bank that creates money out of thin air for a commission, this kind of activity will add dubious value as the players in the central bank club will have a significant advantage over everybody else.

There is only one core mission of any trader which is to satisfy their clients (Maybe themselves) by making their clients more than market returns or by trading away risk so the clients can profit in other areas without as much downside.  So any other core mission is just the product of regulators interferring in the market place.

There is no need to cut down competition as this type of activity is a symptom of the many problems created by regulation and not the cause.

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Stock exchanges are a heavily regulated market. There are only a tiny handful of stock exchanges in each nation that has them, which should give you a hint that there's probably some heavy regulation involved. I would imagine that if there were more competition in the market for stock exchanges, the exchanges themselves would develop their own standards for the highest permitted trading frequency. Competition between exchanges would ensure that the "right" trading frequency - including the possibility that there may be many correct frequencies - would emerge.

Clayton -
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