Wednesday, April 2, 2014

Two Institutional Traders Speak Out About High Frequency Trading

Clifford S. Asness, Michael Mendelson at AQR Capital Management write in WSJ:
A few nights ago, CBS’s “60 Minutes” provided a forum for author Michael Lewis to announce that Wall Street is “rigged” and for the sponsors of a new trading venue called IEX to promise to unrig it. The focus of the TV segment was high-frequency trading, or HFT, an innovation now over 20 years old.

The stock market isn’t rigged and IEX hasn’t yet generated a lot of interest. In our profession, what we saw on “60 Minutes” is called “talking your book”—in Mr. Lewis’s case, literally.

The onslaught against high-frequency trading seems to have started about five years ago when a blogger made a wildly exaggerated claim about one firm’s HFT profits. Nowadays after any notable market event, and again last Sunday for no reason other than a book launch, the world gets bombarded with arcane details and hyperbolic assertions about HFT strategies. If you find the discussion overwhelming, we have some good news: The debate can be understood without knowing how equity orders are routed, matched or canceled.

Few professionals completely understand the details of market microstructure. Rather, when someone has a strong opinion about the subject, it’s likely to be what they want you to believe, not what they know.

Our firm, AQR Capital Management, is an institutional investor, primarily managing long-term investment strategies. We do not engage in high-frequency trading strategies. Here is where our interest lies: What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes our business slightly more valuable.

How do we feel about high-frequency trading? We think it helps us. It seems to have reduced our costs and may enable us to manage more investment dollars. We can’t be 100% sure. Maybe something other than HFT is responsible for the reduction in costs we’ve seen since HFT has risen to prominence, like maybe even our own efforts to improve. But we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs...

One of the biggest headline-grabbing worries about HFTs is how fast the trades are conducted. The speed sounds unnecessary, dangerous and possibly nefarious—”These guys care about the speed of light!” For the most part, though, HFTs don’t need that super speed to get ahead of the little guy or even institutional traders, but to get ahead of other HFTs. Some of the loudest complaints about high-frequency trading come from the slower traders who used to win the races.


  1. It's amazing to me that so much time & energy is being spent on HFT now that the MSM has their meat hooks into it and Boobus is entertained.

    Just think if we could get even 10% of that energy into investigating gold/silver manipulation, the Bundesbank gold request situation and naturally as a result a full audit of the gold at Fort Knox. How can you not assume the worst about the MSM under the current conditions?

  2. Asness not only speaks his book, but that of all of Big Wall Street. Did he neglect to mention he had been a managing director at Goldman Sachs?

    The IPO just pulled from a HFT firm should leave no doubt: they had 1 losing day in 4 years of trading. The best traders in the world, on average, have 1 losing day out of every 4 -6. The "success" (SIC) of HFT is not possible, other than via theft, or what ought to be theft.

  3. The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.

    On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.

    By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.

    read this somewhere recently...

    " Liquidity is essentially illusory. Folks often say that spreads have tightened, therefore liquidity has increased, and the fact of the matter is that spreads have tightened, but only nominally. You can't buy and sell stocks based on the spread you occasionally see on the screen. "

    1. "This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors."

      You really should read some thought on insider trading being nothing more then a faster method of "finding price" and not anything that should represent a crime.

    2. High-frequency trading is a growing cancer that needs to be addressed

      April 3, 2014

      They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.

      The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.

      Charles Schwab, Founder and Chairman
      Walt Bettinger, President and CEO

  4. The news that HFT is abused is not new, so why the move now? The reason is that HFT is an instrument or causa remota in amplifying the Great Stock Market Pump of the last several years. HFT combined with extreme doses of Quantitative Easing is like that last shot of Tequila you shouldn’t have had before you wake up and find your face laying on the table in a pool of your own drool.

    Without a doubt these operators front run the massive leveraged corporate stock buyback programs that has been a key component of inflating the stock market. I have little doubt that key HFT operatives are given advance notice when a slug of corporate stock is about to be bought back at the trading desks. But I some how doubt that this aspect will be revealed in the FBI investigations.

  5. Moral Blindness Syndrome (MBS)

    This moral blindness is tolerated because there is very big money
    involved, and the potential for very negative career consequences. As
    they say, it is the bribe or the bullet. It is easy to excuse
    because it involves 'white collar' crimes that engage wide swaths of
    the most influential voices in our society.

    They retreat into blaming the victims, silencing the critics, repressing
    even peaceful protests, praising their own exceptionalism, and coercing
    the outliers, others, and dissidents. The system is the lie, and so
    the lie must be protected for the sake of the system.

    I wonder if there is a need to have news people, and economists,
    and politicians to take some basic courses in ethical behavior. They
    are certainly doing a wonderful job of suppressing their moral
    sensibilities when it comes to financial fraud, even if the laws do not
    overtly define and indict these abuses as 'crimes.'

    And when someone points out the hypocrisy and fraud, they first ignore
    them, and then panic and attack. How dare they undermine the confidence
    of the system! For they have become creatures of the system, and that
    is a big part of the problem in the credibility trap.

    They do not get it. They are suffering from a severe case of moral
    blindness as described by Upton Sinclair when he said, 'It is hard to
    get a man to see something when his paycheck depends on his not seeing

    And the example they give as public figures, from Wall Street to the
    Beltway, is rotting the future of our country, down to the bone.