Race, Sex and "The Rig" :
Why High-Frequency Trading is Here to Stay!
by Joshua Enomoto, Founder of JYE Financial
Summary : In this article, I provide an explanation to the controversy surrounding high-frequency trading (HFT) and acknowledge some of the consequences of the practice. However, the mere existence of HFT does not constitute market manipulation as its intentions correlate with the capitalist ethos. Further, there are a number of social practices or paradigms that disadvantage certain traders yet these issues go unaddressed. Finally, I address the idea that the choice to take on any side of the trade goes against the accusation that markets are rigged.
The stock markets are rigged, proclaims Michael Lewis, a best-selling non-fiction author and financial journalist. In his latest submission, "Flash Boys," Mr. Lewis writes that the stock market is heavily levered towards high-frequency traders, who use advanced algorithms to gain an advantage over other, more traditional traders, by pushing out orders that travel quicker by the slimmest of margins. "They're able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," says Lewis. "The speed advantage that the faster traders have is milliseconds...fractions of milliseconds."
High frequency trading, commonly abbreviated as HFT, has been at the forefront of controversies in recent years, most notably on May 6, 2010, a day in market notoriety known simply as the Flash Crash. Without warning, the Dow Jones Industrial Average plunged nearly 1,000 points, only to recover the loss within a matter of minutes. This was enough to secure this incident into the record books as the biggest one-day decline on an intra-day basis in the venerable index's history.
After months of investigation, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report revealing the causational chronology that ultimately led up to the sudden and steep sell-off. According to a Wall Street Journal article entitled, "How a Trading Algorithm Went Awry," the joint report stated that the day of the Flash Crash began with unusual turbulence, with the Dow Jones trading nearly 300 points below the prior session at 2:30pm Eastern Standard Time. Two minutes later, a trader at Waddell & Reed, a major investment firm, placed a large order to sell E-mini futures contracts, a financial instrument that mimics the price fluctuation of the benchmark S&P 500 index.
The amount of the order, $25 billion, was nominally significant but not unusual for a firm of Waddell & Reed's caliber. Often times, institutions require hedging their bets against downside volatility in order to protect their individual holdings, and therefore, a mixture of large buy and sell orders is to be expected. What was not anticipated was the speed of the order. The Waddell trader used an algorithm to execute the sales order, which uses programming to replace a human operator through implementation of logic based formulations that take into account real-time variables. In this particular case, the trader inputted a set of "loose" logical requirements, which resulted in the dumping of 75,000 E-mini contracts in just 20 minutes. For context, the joint report by the SEC and CFTC revealed that a human trader selling off an equal-sized order earlier in 2010 took 5 hours to execute.
This action catalyzed a cascading affect. According to the report, "HFTs began to quickly buy and then resell contracts to each other—generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth." At one point, it was noted that firms utilizing HFT algorithms traded more than 27,000 contracts in just 14 seconds. In response, the Waddell algorithm picked up the pace of its own selling efforts, despite prices now spiraling lower.
Incidents such as the Flash Crash definitely underlines the risks inherent in the stock market : with so many institutional players leveraging huge amounts of capital in nano-seconds, there is bound to be market distortion and other unforeseen, perhaps financially lethal consequences. The SEC later introduced policies that would freeze trading when individual stocks exhibited statistically abnormal volatility, muting the potential domino effect of HFT's and giving the human trading community a psychological breather to more calmly and rationally re-assess the situation.
But would it be fair to characterize the entire markets as rigged? Mr. Lewis asserts that it is not just high frequency traders that receive an inordinate benefit in the investment game, but also Wall Street banks and the stock exchanges themselves. This would imply a technocratic hegemony, a rising struggle between the frequency-endowed bourgeoisie and the perpetually victimized proletariat, mired under the constraints and surely losing the collective sympathy of human frailty.
The problem goes well beyond the mere granularities of geeks gone mad, but stems largely in the competitive culture of the greater collective consciousness, a critical component of free-market capitalism. While the merits of computerized leverage within the financial markets can be debated indefinitely, the desire to seek that advantage is not. The aspiration is at the heart of American ingenuity. In many cases, this has tempted the usage of serious improprieties, such as corporate executives trading on privileged information not accessible to the general public.
But if markets were truly rigged, why go through the hassle of implementing such complex systems in order to gain a miniscule advantage? First of all, the application of HFT algorithms in and of themselves do not guarantee profitability and misuse of the program can set off catastrophic results : even if the algorithm user is not affected by its own wake, the destruction will set off alarm bells in front of a live audience of billions, thus assuring strict regulation and the likely end of alleged risk-free arbitrage. Second, HFT usage is not limited to a select few : indeed, if competitors wish to gain the algorithmic advantage, they can buy faster, more efficient programs. Instead of a rigged market, HFT's have created a mini-industry within finance itself, the race to find the quicker trading-bot and thus cementing the very definition of capitalism.
Even the usage of HFT's is hardly a clear-cut moral issue. In the notorious case of the aforementioned Waddell trader that set off the Flash Crash, he was selling off billions of futures contracts in order to protect his firm's clientele. That he was the first to do so and that he wanted to secure the best price possible can hardly be considered an immoral act ; actually, it's a fiduciary duty to act in the best interest of the client. So to label HFT as an "evil game" played by an elitist Wall Street will inevitably lend a charge to hypocrisy : HFT, especially in the case of the Flash Crash, was used to help clients from all walks of life protect their capital.
To solely pick on high-frequency trading also ignores many other uncomfortable advantages afforded to people working in the investment industry on the basis of size, personality, and race. For example, shoveling through in the daily grind of the commodities pit, where traders shout their orders to market specialists, heavily favors those of bigger stature and of a pit-bull mentality. Even as society at large has progressed to a more genteel and cerebral norm, the commodities pit is veritably stuck in the Dark Age, where intelligence is far superseded by brute strength. No wonder then that so many washed up pro-athletes end up in the pit and the smart ones end up creating algorithms!
by Joshua Enomoto, Founder of JYE Financial
Summary : In this article, I provide an explanation to the controversy surrounding high-frequency trading (HFT) and acknowledge some of the consequences of the practice. However, the mere existence of HFT does not constitute market manipulation as its intentions correlate with the capitalist ethos. Further, there are a number of social practices or paradigms that disadvantage certain traders yet these issues go unaddressed. Finally, I address the idea that the choice to take on any side of the trade goes against the accusation that markets are rigged.
The stock markets are rigged, proclaims Michael Lewis, a best-selling non-fiction author and financial journalist. In his latest submission, "Flash Boys," Mr. Lewis writes that the stock market is heavily levered towards high-frequency traders, who use advanced algorithms to gain an advantage over other, more traditional traders, by pushing out orders that travel quicker by the slimmest of margins. "They're able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," says Lewis. "The speed advantage that the faster traders have is milliseconds...fractions of milliseconds."
High frequency trading, commonly abbreviated as HFT, has been at the forefront of controversies in recent years, most notably on May 6, 2010, a day in market notoriety known simply as the Flash Crash. Without warning, the Dow Jones Industrial Average plunged nearly 1,000 points, only to recover the loss within a matter of minutes. This was enough to secure this incident into the record books as the biggest one-day decline on an intra-day basis in the venerable index's history.
After months of investigation, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report revealing the causational chronology that ultimately led up to the sudden and steep sell-off. According to a Wall Street Journal article entitled, "How a Trading Algorithm Went Awry," the joint report stated that the day of the Flash Crash began with unusual turbulence, with the Dow Jones trading nearly 300 points below the prior session at 2:30pm Eastern Standard Time. Two minutes later, a trader at Waddell & Reed, a major investment firm, placed a large order to sell E-mini futures contracts, a financial instrument that mimics the price fluctuation of the benchmark S&P 500 index.
The amount of the order, $25 billion, was nominally significant but not unusual for a firm of Waddell & Reed's caliber. Often times, institutions require hedging their bets against downside volatility in order to protect their individual holdings, and therefore, a mixture of large buy and sell orders is to be expected. What was not anticipated was the speed of the order. The Waddell trader used an algorithm to execute the sales order, which uses programming to replace a human operator through implementation of logic based formulations that take into account real-time variables. In this particular case, the trader inputted a set of "loose" logical requirements, which resulted in the dumping of 75,000 E-mini contracts in just 20 minutes. For context, the joint report by the SEC and CFTC revealed that a human trader selling off an equal-sized order earlier in 2010 took 5 hours to execute.
This action catalyzed a cascading affect. According to the report, "HFTs began to quickly buy and then resell contracts to each other—generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth." At one point, it was noted that firms utilizing HFT algorithms traded more than 27,000 contracts in just 14 seconds. In response, the Waddell algorithm picked up the pace of its own selling efforts, despite prices now spiraling lower.
Incidents such as the Flash Crash definitely underlines the risks inherent in the stock market : with so many institutional players leveraging huge amounts of capital in nano-seconds, there is bound to be market distortion and other unforeseen, perhaps financially lethal consequences. The SEC later introduced policies that would freeze trading when individual stocks exhibited statistically abnormal volatility, muting the potential domino effect of HFT's and giving the human trading community a psychological breather to more calmly and rationally re-assess the situation.
But would it be fair to characterize the entire markets as rigged? Mr. Lewis asserts that it is not just high frequency traders that receive an inordinate benefit in the investment game, but also Wall Street banks and the stock exchanges themselves. This would imply a technocratic hegemony, a rising struggle between the frequency-endowed bourgeoisie and the perpetually victimized proletariat, mired under the constraints and surely losing the collective sympathy of human frailty.
The problem goes well beyond the mere granularities of geeks gone mad, but stems largely in the competitive culture of the greater collective consciousness, a critical component of free-market capitalism. While the merits of computerized leverage within the financial markets can be debated indefinitely, the desire to seek that advantage is not. The aspiration is at the heart of American ingenuity. In many cases, this has tempted the usage of serious improprieties, such as corporate executives trading on privileged information not accessible to the general public.
But if markets were truly rigged, why go through the hassle of implementing such complex systems in order to gain a miniscule advantage? First of all, the application of HFT algorithms in and of themselves do not guarantee profitability and misuse of the program can set off catastrophic results : even if the algorithm user is not affected by its own wake, the destruction will set off alarm bells in front of a live audience of billions, thus assuring strict regulation and the likely end of alleged risk-free arbitrage. Second, HFT usage is not limited to a select few : indeed, if competitors wish to gain the algorithmic advantage, they can buy faster, more efficient programs. Instead of a rigged market, HFT's have created a mini-industry within finance itself, the race to find the quicker trading-bot and thus cementing the very definition of capitalism.
Even the usage of HFT's is hardly a clear-cut moral issue. In the notorious case of the aforementioned Waddell trader that set off the Flash Crash, he was selling off billions of futures contracts in order to protect his firm's clientele. That he was the first to do so and that he wanted to secure the best price possible can hardly be considered an immoral act ; actually, it's a fiduciary duty to act in the best interest of the client. So to label HFT as an "evil game" played by an elitist Wall Street will inevitably lend a charge to hypocrisy : HFT, especially in the case of the Flash Crash, was used to help clients from all walks of life protect their capital.
To solely pick on high-frequency trading also ignores many other uncomfortable advantages afforded to people working in the investment industry on the basis of size, personality, and race. For example, shoveling through in the daily grind of the commodities pit, where traders shout their orders to market specialists, heavily favors those of bigger stature and of a pit-bull mentality. Even as society at large has progressed to a more genteel and cerebral norm, the commodities pit is veritably stuck in the Dark Age, where intelligence is far superseded by brute strength. No wonder then that so many washed up pro-athletes end up in the pit and the smart ones end up creating algorithms!
On
the other end of the spectrum are the financial advisors, the well-dressed and
manicured representatives that hold up the esteemed ideals of their associated
financial firms and distract the general public from the dirty games that are
often played in the wild world of "stock marketry." That many
financial firms seemingly favor tall, attractive Anglo-Saxons of either sex should
come as no surprise, although the articulation of the above may be off-putting
in this politically sanitized world of ours. But let's face reality here : the
American markets are by and large the domain of the white male and efforts to
cater to that demographic will inevitably favor certain racial groups over
others.
Does that suck if you are a minority attempting to break into the good 'ole boys club? Absolutely! But thank God we live in a country where mere suckage does not condemn us to immediate government intervention, a well-meaning solution that ultimately paves the way to perdition. Regardless of our personal circumstances, we must come to a mature realization that life is inherently unfair : we have to make it fair, through grit and perseverance.
Taken in that light, the abolition of high frequency trading may be considered un-American, an attack against the capitalist ethos that would arouse the spirit of McCarthyism. Why should investment firms that refuse to get along with the times be rewarded with their apathy? Trading is all about gaining an advantage against your opponent, a pure zero-sum game where every winner must necessitate a loser. That losers exist is not a fault of the capitalist ethos ; rather, it's the system's strength, the herding out of the slow and apathetic in favor of the quick and efficient.
In my opinion, high-frequency trading will never be stamped out and any efforts to police it will and should fail. To attempt to create a system where orders are received in a "fair manner" is short-sighted, even asinine. Even if the flow of trading were to be artificially decelerated, someone will always get an advantage over another. And within this established framework of deceleration, there will exist a technology designed to get that extra nano-second for the competitor that wants to pay for that advantage.
Lastly, we need to understand that market crashes are a result of mass human psychology driving up demand faster than supply can keep up. Once the last person in the herd realizes the distortion between price and true valuation, the end is imminent. This has been the case throughout the entire history of financial trading, and no amount of technology will change this core principle. The fact that people, not algorithms, drive valuations is perhaps the greatest criticism against the idea that markets are rigged : each of us as participants have the ability to take any position and any side of the trade. That this zero-sum game is applied equally to all that come in assures us that no one entity can control the market.
Does that suck if you are a minority attempting to break into the good 'ole boys club? Absolutely! But thank God we live in a country where mere suckage does not condemn us to immediate government intervention, a well-meaning solution that ultimately paves the way to perdition. Regardless of our personal circumstances, we must come to a mature realization that life is inherently unfair : we have to make it fair, through grit and perseverance.
Taken in that light, the abolition of high frequency trading may be considered un-American, an attack against the capitalist ethos that would arouse the spirit of McCarthyism. Why should investment firms that refuse to get along with the times be rewarded with their apathy? Trading is all about gaining an advantage against your opponent, a pure zero-sum game where every winner must necessitate a loser. That losers exist is not a fault of the capitalist ethos ; rather, it's the system's strength, the herding out of the slow and apathetic in favor of the quick and efficient.
In my opinion, high-frequency trading will never be stamped out and any efforts to police it will and should fail. To attempt to create a system where orders are received in a "fair manner" is short-sighted, even asinine. Even if the flow of trading were to be artificially decelerated, someone will always get an advantage over another. And within this established framework of deceleration, there will exist a technology designed to get that extra nano-second for the competitor that wants to pay for that advantage.
Lastly, we need to understand that market crashes are a result of mass human psychology driving up demand faster than supply can keep up. Once the last person in the herd realizes the distortion between price and true valuation, the end is imminent. This has been the case throughout the entire history of financial trading, and no amount of technology will change this core principle. The fact that people, not algorithms, drive valuations is perhaps the greatest criticism against the idea that markets are rigged : each of us as participants have the ability to take any position and any side of the trade. That this zero-sum game is applied equally to all that come in assures us that no one entity can control the market.
