HFT and the Demise of the Megafauna

Now the buyside is up in arms over their “treatment” in the new high frequency arms race that has, in my view, become a destructive force in the investing world.

About time the “big, dumb beasts” have weighed in.  I was beginning to think that they didn’t mind have their buy and sell orders discovered and gnawed on.

Eons ago, every single continent had megafauna (giant animals) roaming the land, but only the megafauna in Africa have survived up until our time.  There isn’t much quite like the hippo, the elephant, the lion or the giraffe outside of the African continent and some parts of Asia.  The reason for this is one of natural defenses. 

Since human beings evolved in Africa side by side with large beasts, Africa’s animals evolved defenses to avoid being hunted to extinction.  Unfortunately, the giant animals of North America or Europe (16 foot tall rats, a moose the size of a rhinoceros) had no such history of tandem evolution, so when humans arrived, they were easily killed off.  They hadn’t the time to develop defenses.

The parallel here is a simple one, high frequency trading has doubled in terms of it’s percentage of trading in less than a ten year time frame.  The big buyside market participants, like mutual funds, pension funds and asset managers, now barely stand a chance when trading with the machines.  They are being scalped, rooked and shaken every minute of the day.

An article in today’s Wall Street Journal is now giving voice to their lamentations on the subject and it is an important read for anyone interested in the debate:

Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm’s trades. “Short-term traders are able to get an instantaneous glimpse into the future” through direct feeds to exchange data, he said, turning the market into “something nearer to a casino.”

High frequency trading advocates make the claim that efficiency and cost have been improved by the additional volume and activity, and these claims do have some merit, this is certainly not a black-and-white issue.  That said, the “gaming” of order flow cannot possibly be looked at as conducive for fair and orderly markets.

Traditional money managers largely agree that some costs have dropped. But some say they find certain trades have become more expensive to carry out, thanks to a practice critics call “gaming.” With gaming, if a high-speed firm’s computers detect a large buy order for a stock, for instance, the firm will instantly start snapping up the stock, expecting to quickly sell it back at a higher price as the investor keeps buying.

Phillip Krauss, head of stock trading at Chicago’s Harris Investment Management, says his firm’s orders are getting picked off by high-speed trading firms that use computer programs to detect orders. “They front-run us,” said Mr. Krauss, whose firm manages $15 billion in assets.

I do not position myself as a thought leader in this field, but I am a market observer and participant and I know firsthand how inhuman this market seems to feel of late.  It is utterly undeniable.  I am open-minded about the benefits of HFT activity, but I am not open-minded about blatantly unfair conditions when it comes to investors.

The debate continues.


Fast Traders Face Off With Big Investors Over ‘Gaming’.  (WSJ)

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