High-Frequency Trading: Networks of Wealth and the Concentration of Power

http://www.uncomputing.org/?p=167

by ChristianMarks • 14 years ago

17 14 14 years ago

anigbrowl3• 14 years ago

An excellent paper, accessible in prepress form from the link. In a nutshell the author's thesis is that technology accelerates discontinuities, of wealth as well as everything else, allowing concentrations of wealth far in excess of Pareto (or any other) optimality.

javert• 14 years ago

technology accelerates discontinuities, of wealth as well as everything else, allowing concentrations of wealth far in excess of Pareto (or any other) optimality.

It's nonsensical to talk about an "optimal" distribution of wealth.

Also, technology allows for more total production (hence more total wealth), which would be great, but social policies in the western world inhibit the general population from scaling the number of children they have to track labor demand.

xanmas• 14 years ago

Optimal, at least in this sense, refers to the optimization of a cost function so we can quibble about the cost function used but optimization in general isn't nonsensical. And really, the OP specified that he was using the Patero sense of optimization with a Patero cost function.

anigbrowl3• 14 years ago

http://en.wikipedia.org/wiki/Pareto_distribution

I should have referred to a 'Pareto distrubtion' rather than 'Pareto optimality' (which is more properly used to describe production possibility frontiers), but the underlying concept here is that it's quite natural for ~20% of the population to control ~80% of the wealth, on the basis that similar proportions recur throughout nature. I think this is 'optimal' insofar as growth is maximized by such a distribution, but of course you only get such distributions in theoretically perfect markets.

tvladeck• 14 years ago

I skimmed the whole paper and expected to see some math. There were no equations. While it's possible to have a real model with no math, it's a lot less likely that that's true, and my first inclination is to believe that this has not been rigorously thought through.

anigbrowl3• 14 years ago

The purpose of the paper is to sketch out a field of investigation for social studies by observing cases which contradict the conventional wisdom in that field, as opposed to a rigorous or complete quantitative analysis. I'm sorry if I oversold it by stating why I considered it significant.

I don't think rigor necessitates the use of equations. Ronald Coase's nobel-winning contributions to the field of economics are almost wholly conceptual and devoid of math; at the opposite extreme, over-reliance on Li's Gaussian Copula proved unwise for Wall Street (http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?curr...).

valuegram3• 14 years ago

What is the point of this article? HFT provides liquidity, and some would argue, more accurate equity pricing.

I have never heard anyone say high-frequency trading leads to a more even distribution of wealth. Since the birth of stock exchanges "trading" has always been a game where the institutions with greater resources have an advantage.

Correlating HFT computerization to the general democratization of data, and it's effect on political institutions is just silly.

ChristianMarks3• 14 years ago

The HFT provides liquidity argument overlooks a crucial point: diminishing returns. You can't increase transaction efficiency indefinitely and expect that the liquidity at vanishingly small intervals is worth much.

valuegram3• 14 years ago

Agreed on the diminishing returns front. Defining necessary/useful liquidity would be impossible. Markets would absolutely function just fine (as they have previously) without HFT, but by definition HFT is increasing liquidity.

ChristianMarks3• 14 years ago

When the time horizons of investment houses, hedge funds and quant specialty shops collapse to the millisecond and microsecond, they have already admitted that it is very hard to get an informational advantage in the market. Now an investment insider could do this in many ways: 1) working harder than other investors, 2) the misuse of nonpublic information through insider trading, 3) control of the treasury and the Fed and 4) HFT. In the case of HFT the informational advantage is detecting the state of market direction and executing trades a microsecond ahead of other investors. What we have here is money trading among the accounts of the investment elite.

ryporter• 14 years ago

It's hard to take a criticism of HFT seriously when the author very confidently asserts a rather extreme definition of it, and thus appears to be talking about a very different subject matter than what I (and, I believe, many others) would consider HFT. From page 12,

HFT encompasses not simply and not even directly the speed of trading..., but rather stands in for the general automation of trading....

HFT may be better understood as the name for the suite of effects that computerization has had on the worlds of securities trading. There is little controversy about this picture within the trading world, including both trading firms themselves and the government bodies that regulate them.

In fact, there is an incredible amount of controversy surrounding this point. According to a CFTC committee [1]:

Specifically, the Commission stated that HFT was a form of automated trading that employs: (a)algorithms for decision making, order initiation, generation, routing, or execution, for each individual transaction without human direction; (b)low-latency technology that is designed to minimize response times, including proximity and co-location services; (c)high speed connections to markets for order entry; and (d)recurring high message rates (orders, quotes or cancellations) determined using one or more objective forms of measurement, including cancel-to-fill ratios.

Any definition of HFT should acknowledge that various types of Automated Trading can exhibit mechanical characteristics of HFT, the commission noted. “However, for automated trading to be considered HFT it needs to match the cumulative criteria that comprises the definition, including recurring high message rates determined using one or more objective forms of measurement.”

[1] http://www.securitiestechnologymonitor.com/news/hft-defined-...

confluence• 14 years ago

> One might argue that securities trading is not a representative social space, because it is so quantitative, because it is so close to (indeed identical with) the movements of pure capital, because it has available to it the most powerful computers and most expert computer technicians money can buy

HAHAHA!

Only in finance do people perceive the incumbents as the future winners. I mean in tech, we mock those with more money, more capital, because we know that no body lasts - everyone is disrupted, and so it goes. It's kind of like government conspiracy stuff, where people think that the government is too incompetent to handle most things, and yet simultaneously believe that somehow they can pull off insanely complex conspiracies. It's like religious people in airplanes - nothing funnier.

You can't have your cake and eat it too.

If you knew how stupid a lot of finance guys were - you'd laugh at statements like this all day long. "Oh no they are bigger than us! Oh no they have better computers! Oh no PhDs!".

HFT is merely a matchmaker. The thing you really have to worry about is irrational capital flow to non-useful assets.

87/97/00/07 -> All of them had essentially nothing to do with tech - they just ran on tech (correlation != causation). It was the idiotic capital allocation by humans that really fucks things up.

Buying Russian/Asian bonds cheap, thinking nothing will go wrong was stupid. Buying companies with no earnings was stupid. Building houses in the desert of Arizona is stupid. Tulip buying is stupid - and that's what all of these "crises" are about - people fucked up - they bought things high, and didn't look carefully until the market fell apart.

All problems in financial markets are not driven by black swans. They are driven by slow moving asteroids - anyone can see miles off if they looked at it critically.

Forward looking: Silicon Valley is moving towards a bubble. Gov bonds are in a bubble. Money Markets are in a bubble.

Equity is cheap. High risk bonds are cheap.

High-Frequency Trading: Networks of Wealth and the Concentration of Power

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