The more the high-frequency trading debate spreads through the media, the more confused we’re getting.
The latest to weigh in on the matter is well-known quant Paul Wilmott, weighing in with a NYT op-ed:
The idea is straightforward: Computers take information — primarily “real-time” share prices — and try to predict the next twitch in the stock market. Using an algorithmic formula, the computers can buy and sell stocks within fractions of seconds, with the bank or fund making a tiny profit on the blip of price change of each share.
There’s nothing new in using all publicly available information to help you trade; what’s novel is the quantity of data available, the lightning speed at which it is analysed and the short time that positions are held.
You will hear people talking about “latency,” which means the delay between a trading signal being given and the trade being made. Low latency — high speed — is what banks and funds are looking for. Yes, we really are talking about shaving off the milliseconds that it takes light to travel along an optical cable.
Oh gee wiz, milliseconds! Can you believe it? Clearly Wilmott is trying to convey that at this level, even he’s uncomfortable with this brave new world of machines doing work normally done by man.
But the problem with Wilmott’s piece is that it seems to confuse this relatively new phenomenon High-Frequency Trading (the main scandal seems to be that computers can trade risk free, swiping a penny here and there from slower traders) and general computer-driven trading strategies, which has been going on for years.
In fact, in talking about the risks of HFT, he specifically cites the automatic portfolio insurance schemes that exacerbated then 1987 crash. But again, we think these are two separate issues, tied together by the fact that in both cases it’s scary, super-duper smart computers behind the actual BUYs and SELLs of shares.
Wilmott ends with a big fat whopper that’s sure to go over well with the NYT set:
Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines — and they’re playing games with real businesses and real people.
Oh, come on, Paul! You’re a quant and you’ve had your own hedge fund. Do you really subscribe to this Mayberry, NC view of the market? (“Aw shucks, Opie, what happened to the good old days of buy and hold?”).
We’re not saying there’s anything wrong with seeing the market that way. Indeed most of us do. But for Wilmott to all of the sudden pretend he’s a Warren Buffett-like value guy, that seems rich.
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