Paul Wilmott on High Frequency Trading

This is a very important perspective on what the rise of High Frequency Trading may mean to our markets and the companies that trade on them.  The piece is short on empirical evidence but long on common sense.

The main questions raised in the op-ed are:

  • Is the liquidity argument that HFT proponents spout so often really that powerful and simple?
  • Why do we need “price discovery” occurring by the millisecond?
  • Doesn’t this algorithmic reliance remind you of the Portfolio Insurance fiasco of 1987?
  • Has anyone considered the fact that machines trading stocks with machines in the virtual world of ECNs can have a real affect on companies and the people who work for them in the real world?

Here’s a passage that I think really gets to the heart of the matter:

So, is trading faster than any human can react truly worrisome? The answers that come back from high-frequency proponents, also rather too quickly, are “No, we are adding liquidity to the market” or “It’s perfectly safe and it speeds up price discovery.”

Those responses disturb me. Whenever the reply to a complex question is a stock and unconsidered one, it makes me worry all the more. Leaving aside the question of whether or not liquidity is necessarily a great idea (perhaps not being able to get out of a trade might make people think twice before entering it), or whether there is such a thing as a price that must be discovered (just watch the price of unpopular goods fall in your local supermarket — that’s plenty fast enough for me), l want to address the question of whether high-frequency algorithm trading will distort the underlying markets and perhaps the economy.

The interest of the journalism/ blogging community in high frequency trading has been piqued…as has that of some major political figures (Chuck Schumer, for one).  One gets the sense that this debate is still in the early innings, yet plain-spoken arguments like Wilmott’s are starting to sway me away from the too-easily accepted “liquidity” canard.

Here’s the rest:

Hurrying Into The Next Panic by Paul Wilmott (NYT)

H/T Abnormal Returns