James Simons, the head of worlds-greatest-hedge-fund Rennaissance Technologies, admitted earlier this year that his results were horrible, after years and years of outperformance. He even sent out an apology letter.
Simons blamed the surprise, post-March, high-volatility rally (a rally that crushed many a quant fund), but we’ve begun to wonder if there isn’t something more. Ren-Tec isn’t just your typical quant fund, and it’s long been suspected, as Eric Falkenstein poitned out yesterday, that the Simons’ real edge has been in using technology to become some kind-of uber-market maker.
This makes us wonder if the much-hyped emergence of High-Frequency Trading (with its flash orders and rebate-capture strategies) is what’s carving out Simons’ profits. If indeed, Simons was just years ahead of the high-frequency traders, then it makes sense that he’d be losing a highly profitable tech-speed edge.
So to limit HFT is to tell Simons that he gets to keep a licence to keep on printing money. This is the case with limiting any kind of innovation, really. To limit it is to tell the previous generation that they get to keep fat, juicy profits, without the burden of new innovators.
Of course, there are a lot of folks who rail against financial innovation and they have what seems like a good reason: it can cause epic blowups. We’re still not convinced that this last crisis was actually caused by innovations, but it’s an acceptable argument, and in the world of HFT, we could imagine, possibly, some computer going buck wild and screwing up the whole market, creating some crash-making feedback loop.
So the question is, do we grant monopoly rents to certain players in exchange for crisis avoidance?
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