Have We Hit Peak HFT? 476
CowboyRobot writes "There was a time when people wanted the fastest networks so that they could trade at lightning speeds. They deployed the smartest formulas at trading venues where no one could know who was asking for that big block of stocks on the other end of the deal. It was a wild time and people made a lot of money along with some very unwise decisions. Wall Street seems to be acting out the lyrics to a Don Henley song. The party's over, the hangover is raging and no one really knows what happened the night before. The number of shares traded via high-frequency trading are down and politicians want to roll out a tax to serve as a speed bump. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio want a .03 percent tax on nearly every trade in nearly every market in the U.S. Some are wondering if microsecond dealings are poised to fade away. As the founder of HFT firm Tower Research Capital Mark Gorton puts it, 'The easy money's gone. We're doing more things better than ever before and making less money doing it.'"
Re:It's only natural. (Score:3, Funny)
The HFT's offer the best bids and asks (or else they wouldnt get any trades) -- there is nothing wrong with better prices for people looking to buy and sell -- really, there isn't -- it doesnt matter if some guy in the middle makes some money in the process - you are still getting a better price.
Notice how most of the people that hate HFT's dont even understand the difference between bids and asks, and that often even the rare few that do show at least this minimum level of understanding they often confuse the two and imagine that bids are higher than asks.
The Efficient Market Hypothesis (Score:4, Funny)
Basically this holds that a large public market is information-efficient. That is the current market prices reflect all publicly available information.
There are a variety of variations on this theme which mostly reflect the strength of the adherence to the hypothesis.
My particular belief is that the semi-strong form of the hypothesis is probably the correct one. You may have temporary bubbles, and markets that have poor disclosure requirements can be inefficient; these disallow the strong form of the hypothesis.
The main reason for the semi-strong being correct is that even market insiders with the best analytical tools are unable to consistently outperform the market averages. Most mutual funds, hedge funds, pensions and endowments actually underperform the market when trading costs are compensated for. Those that do outperform cannot do it on a consistent basis. There is no correlation between good performance one year and the next.
The idea that the game is rigged and only insiders have a chance is provably wrong. An individual investor using minimum cost passive investing strategies and good diversification will consistently outperform professionally managed portfolios just because of the lower costs. Any advantages that deviations from EMH are too small to overcome the trading costs needed to take advantage of the inefficiency.
Now that HFC trading is mature, it is showing the same efficient market behavior. It just isn't worth the costs because the market has wrung out any advantages of this mode of trading.
http://en.wikipedia.org/wiki/Efficient-market_hypothesis [wikipedia.org]