Flash boys and High Frequency Trading

High Frequency Trading (HTF) can become a quite expensive hidden tax for your pension fund: 

 

"By December 19, 2013, the people newly installed on top of Goldman Sach's stock market operations, Ron Mogan and Brian Levin wanted to change the way market worked. They truly believed that the market at the heat of the world's largest economy had grown to complex, and was likely to experience some catastrophic failure. But they also were trying to put an end to a game they could never win or control (high frequency trading). And so they'd flipped a switch, and set lots of their customer's stock market orders to IEX. When they did this they started a process that, if allowed to play out, would take billions from Wall Street and return it to investors. It would also create fairness.

 

A big wall street bank was a complex environment. There were people inside Goldman Sachs less then pleased by what Levin and Morgan had done. And after December 19 the firm had retreated, just a little bit. It was hard even for Brad Katsuyama to know why. Was it changing its collective mind? Had it underestimated the cost of being a first mover. Was it too much to ask Goldman Sachs to look up from short-term profit and study the landscape down the road. It was possible that even Goldman Sachs did not know the answers to those questions. Whatever the answer, something Brian Levine had said still made a lot of sense. "There will be a lot of resistance" he'd said. "There will be a lot of resistance. Because a tremendous infrastructure has been built up around this." It’s worth performing Goldman Sachs-like costs benefit analysis of this infrastructure, from the point of view of the economy it is meant to serve. The benefit: Stock market prices adjust to new information a few milliseconds faster than they otherwise might. The costs make a longer list. One obvious cost is the instability introduced into the system when its primary goal is no longer stability but speed. Another is the incalculable billions collected by financial intermediaries. That money is a tax on investment paid by for the economy; and more than productive enterprise must pay for capital, the less productive enterprises, there will be. Another costs, harder to measure was the influence of all this money exerted, not just on the political processes but on people's decisions about what to do with their lives. The more money to be made by gaming the financial markets -and create narratives to explain to themselves why a life spend gaming financial markets is a purposeful life. And then there is maybe the greatest costs of all: Once the very smart people paid huge sums of money to exploit the flaws in the financial system, the have the spectacularly destructive incentive to screw up the system even further, or to remain silent as they watch it being screwed up by others. 

The costs, in the end, is a tangled-up financial system. Untangling it requires acts of commercial heroism- and even then the fix might not work. There was simply too much to easy money to be made by the elites if the system worked badly than it worked well. The whole culture had to want change. "We know how to cure this", as Brad had put it. "It's just a matter of whether the patient wants to be treated".

 

 

Here the link to the new founded IEX stock exchange (Its story is captured in the book Flashboys) making life of high frequency traders a bit more difficult and reducing the hidden costs of the system for pension funds and other institutional investors.

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