Behind the scenes on May 6 there was a battle between HFT traders and a whole mass of angry traders they stole jobs from.
There are a lot more angry traders than HFT traders, and they want the one simple law that could eliminate HFT in place.
May 6 seemed like the perfect opportunity to further HFT-restricting legislation, but since then, HFT have been almost totally vindicated. There’s no sign that the crash was caused by a rogue computer algo.
Manoj Narang, who’s on a mission to vindicate HFT traders, told us that this whole notion that the computers are taking over!? Just isn’t happening.
John Paulson made more money in 2008 than everyone in the entire high frequency trading (HFT) industry combined?
He did, says Manoj, but as long as HFT continues to steal people’s jobs, people will love to draw greedy, money-making devil ears on their computers.
Manoj thinks it’s mostly because HFT has taken over jobs in at least five different short-term trading markets: market-makers, “scalpers,” specialists, floor traders, and day traders. They’re gone, and they’re pissed.
“Now that’s all automatic,” says Manoj. “HFT has rendered them obsolete, so they’ve taken to the airwaves” to campaign against HFT.
And as a result, he says, “very few HFT are willing to talk to the press.”
It’s actually more like HFT “took over” around 1990, when high speed computer trading entered the marketplace, he says. Then it peaked in late 2008, “when volatility was so high, it led a lot of people to start, including us (Tradeworx),” says Manoj. That’s when short-term trading was at a high too. Then the industry retreated later in 2009, while many HFT completely missed the March-September 2009 rally.
Now “there’s no room for growth” in the industry, he says.
And those short-term traders that do still exist make much less than they used to, because they used to make much of their money on transaction fees. Traders used to make much more money on a $.06 spread between a bid and ask price than they do now, when the spread is more like $.01 and lower.
HFT “decimalized” trades. So when short-term traders buy on the ask and sell on the bid, they make a lot less now. HFT traders can trade at such a high volume, they do fine, explains Manoj. But the day traders make a lot less on each trade.
So there’s an economic incentive for floor traders and the like to come out swinging and trash the HFT industry. And there are a lot of people who are angry about it – which might be why politicians in favour of the transaction tax, because it would completely destroy HFT.
“There was a palpable shift in the narrative about HFT,” says Manoj. “The public sentiment was that HFT causes volatility when they do trade. Now it’s flip-flopped.” Basically, we and the market realised that they need HFT.
That’s why Manoj wants to re-brand the “flash crash” on May 6, “Seis de Mayo.”
Read more about Seis de Mayo.