Friday, October 26, 2012

Discussion Topic 10/26/2012
We have talked a lot about macro economy. Let's take a look at security trading. Do you think High Frequency Trading is a good thing for efficient market? Why? What regulators can do to avoid huge volatility caused by HFT? 


  1. Tim Shoji
    I think HFT is generally good in that it provides a lot of liquidity for the market. From the small investor's perspective, this is obviously a good thing; I can buy and sell whenever I want, at the price I expect. Nevertheless, the critics have a fair point in that HFT may cause a lot of volatility in the market, though it's not always clear whether the volatility is caused by HFT or if it's just fundamental volatility. My personal belief is that a lot of these algorithms will get smarter and smarter. They will learn from past mistakes and get better; the ones who don't improve, will be punished in the marketplace. For our regulators, I think they really need more resources in the modern digital age so that they're not always playing catch up against the market. What they need to do is come up with a scheme that makes sure that should one of the HFT firms (or multiple ones) make mistakes, they don't end up crippling the market. Having such a measure in place can contribute to improving investor confidence and strengthen the market in the long run.

  2. Glenn:
    HFT has become a "cottage industry" in and of itself, that has evolved out of the speed of information traveling faster and faster as technology has improved. This was an inevitable result of technology improvements, specifically Moore's Law (computing power doubles every 18 months). At this rate, we are going to see even HIGHER frequency trading, because a .001 second reaction time gets beaten by a .000001 second reaction time. Those that can place their trades and react to news more quickly will be able to reap the rewards. When traders trade, they are not trading purely against the "market", against other traders. The individual investor sitting at home will probably not have access to ultra-high speed HFT tools. Personally, I believe that it is becoming more and more difficult to be an individual investor when one has to compete against institutions moving the market in their own favor whenever they choose to do so.

  3. Pian Li:
    On one hand, HFT sometimes is a good trading method since it help investors get rid of the trades they don't want immediately and get what they want very quickly. To the market, it increases the liquidity. On the other hand, if the trading speed is too fast, maybe the trading will never related to technical analysis. Instead, the technology will contribute to the tradings which obey the principle of trading. The market will lose its meaning. Thus, my attitude is neutral. I think as long as there are good policies to control the HFT, the effect will be powerful and positive.

  4. Amine Bensaid:
    HFT has been the center of a lot of debate recently. A lot of black boxes are not even trading on the news anymore, their algorithms are much more sophisticated than before. For example, when a news flash is released you would expect the markets to react in a certain way. But those algorithms are made by very smart people who know how manipulate the markets in the short-term.

    I read numerous reports that argued that black boxes owners used illegal trading techniques in order to beat the market. For instance I read an article on CNBC about a black box that did not make a single trade and still made 4% profits!!.... ""

    To conclude, people who make those algorithms are just smarter and faster then legislators. We will reach a point when those black boxes will hurt the market in a way that regulators will have to establish new rules (i.e. 2010 Flash Crash where the Dow dropped 1000 points in minutes)

  5. Mengyao Kong:
    As a standard defined small investor, personally, I like these HFTs. Because of them, I could trade anytime I want; because of them, I could trade at a bigger price range; because of them, I could trade at a market with enough reactions. For small investors, you would never have the symmetrical information as the big one. The only thing we could do is set a profit point, get into market at the price you think it is reasonable. What I did for selling a stock is just to set a limit price and let it go.

    We don’t have enough time and energy to keep an eye on that. The advantage of these HFTS is to help us to broad the price range, so we could make a deal at that time.

    Also, I never heard something about black boxes, I am interested in that and I hope Amine could explain more to me tomorrow.

  6. Jason Zhang:
    The good side of HFT is obviously increase the liquidity and effeciency of the market. As we move forward to more effecient market, HFT is reasonable to exist. That's how institutional investors can make money in the first place. It is now rather easy for investors to see money making opportunities, for example, the quarterly reports released with higher than expectation revenue, everybody will want to buy it. Assume there is no inside information, how much money you can make really depends on how fast you can make the order. From an individual investor's perspective, I can never beat the big players, I don't expect to do beat them, all I want is to follow my own expectation and hope the winner of institutional investors are on the same side with me. As the market become more effecient, I can build my expectation more accurately.

    The bad side is volatility. That is what the regulation can prevent. Surely that regulators can set limitation on price rise and falls on single day like Chinese do, but it will be at a cost of effeciency. so it is a trade-off, I think it depends on how much damage it can make to people's confidence on economy if stock price plug down like 20 percent, and regulators will find an optimal amount of limitation based on that finding.

  7. Tian Tan:
    1. HFT provides liquidity. They accounts for more than 70% trades in the US market now and more than 50% in the world market.
    2. HFT helps lead to efficient market because they make arbitrage trades all the time.

    1. HFT causes huge volatility.
    2. HFT makes normal investors harder to make profit in the short run.
    3. HFT may distort the market using programs that even the regulators can not understand.