While talking with traders, one of the topics that keeps coming up is how much the markets and trading have changed recently.
of the primary catalysts to such change has been the amount and
frequency of government intervention and stimulus. Another big driver of
change has been the massive shift to algorithmic or program trading.
Recently, the piece of this getting the most press and attention
is high-frequency trading.
Below is an interesting video where Mark Cuban, Dallas Mavericks
owner and high-profile entrepreneur, shares some thoughts about why high-frequency trading
Here is the video. The market related comments start about 30 seconds into the clip.
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Some people may watch that video and assume that
high-frequency trading is a bad thing, or something to be regulated and minimized. However, there is another side to the argument.
Let me digress for a moment. If I talked to an entrepreneur, and asked them what the biggest constraint on their business was … some might say it's the Obama administration and their policies. This is absurd, because they don't have any control (or at least meaningful control) of that supposed constraint. Instead, that is simply a "reality" of the current competitive environment for them and others.
What that means is the thing they control is how they respond to that competitive environment. For some, what they perceive limits their options or thwarts their strategies. For others, it is a catalyst for new action, new strategies, and new ways to win.
So, why is Cuban afraid of high-frequency trading? First, he believes we are likely to see another "flash crash". Second, an increasing percentage of market action is a result of algorithms trying to outsmart algorithms (and he recognizes that the decisions they are making happen faster than humans can respond to our comprehend). As a result, human intervention isn't the answer because any actions would occur too late.
Some people recognize the advantage algorithmic traders are gaining and seek to weaken it (or at least slow it down), while others pull their money out of the market because of their disadvantage and the new risk. Contrast that with those that see the advantage and try to figure out how to extend it or get some of it for themselves.
It's like most things in life, it's not as much about what happens, it's about what you do.
Cuban and others (myself included) that are up in arms about HFT are in effect “lobbying” to remain competitive. In the meantime, I assume most indeed are trying to adapt to retain edge. Objectively, I imagine there are both pro’s and con’s for the practice. But businesses are not objective. They talk their respective “books”.