Posted by: jhamon | July 22, 2009

The Future is High Frequency Trading. NOT.

NEW YORK - DECEMBER 16:  A television plays at...


FINalternatives presents the results of an industry poll suggesting that high frequency trading is where the future is for the best and brightest on Wall Street.  (High frequency trading is where algorithmic traders flip stocks literally within in milliseconds to minutes.)   

High-frequency trading has grown exponentially in the past several years, and, according to the FINalternatives 2009 Technology and High-Frequency Trading Survey, that growth is here to stay.A whopping 90% of respondents think that HFT [ed. high frequency trading] has a bright future. In comparison, only half believe that the investment management industry has favorable prospects, and only 42% have a positive outlook when it comes to the U.S. economy. Given that dose of pessimism, it should be noted that HFT tends to work particularly well in volatile range-bound markets like the current economic environment.

The optimism for HFT—which research firm Tabb Group estimates accounts for 73% of equities trading volume on U.S. exchanges—is bound to bring additional skill and capital to the high-frequency arena. At present, many financial industry participants understand the business of HFT, yet few understand the details and implementation involved. Some 39% of hedge fund managers, investment advisers, executing brokers and proprietary traders have just “a little” understanding of the high-frequency business, according to the FINalternatives survey, with 52% reporting a solid understanding. By contrast, only 40% of the respondents report that they had a solid grip on the implementation of HFT, with 19% reporting no understanding of implementation tactics whatsoever. 

There are a few things that I find interesting about this article:

  • The most disturbing point is the Tabb Group’s estimate that nearly three quarters of daily trading volume is is driven by high frequency trading.  Think about that, common sense Americans: the vast majority of stock exchange daily volume is pure noise – not accumulation of stocks, not even distribution of stocks by institutions – but computers flipping stocks on an intraday basis.  If true, this suggests that a huge amount of money has left the U.S. markets and implies a lot less capacity for new issues (how we finance companies in a free market) in the future.  Things are far more broken than I even realized.
  • The future can’t possibly be in high frequency trading.  Why?  Because the masses always drive in the rear view mirror – people bought “cheap” dot com stocks all the way down into 2003 and the airwaves are still full of house flipping and home remodeling shows.  Wherever everybody’s focus is, that’s where “it” already was.  Said another way: now that everybody’s running after HFT, game over. 
  • Besides that common sense observation, the fact that HFT is essentially superfast computer arbitage of one team trying to game the other means that is always about who has the fastest computer and the cutest algorithm of the week.  (See my previous posts: Goldman Loses Nuclear Football and Why Goldman Will Not Be Our Broker.  I believe this shennanigans is where Goldman has been driving returns.)
  • On a personal note, I am so glad our strategies are focused on intermediate term trading.  The fact the smartest guys have abandoned that space means that that’s where the opportunity will be…
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  1. […] that with my own recent posting noting that fully three quarters of market trading volume is just high frequency share flipping noise and you have a bleak […]

  2. […] that with my own recent posting noting that fully three quarters of market trading volume is just high frequency share flipping noise and you have a bleak […]

  3. […] Rally In The Face Of Outflows. Hmmmmm? Joe Saluzzi of Themis Trading, whom I don’t know personally, just seems to be a stand-up guy.  He’s got plenty of really good insight into current market dynamics (e.g. the fun and games I discussed in my post The Future is High Frequency Trading.  NOT) […]

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