Incidence

By James Kwak

One of the criticism’s of Michael Lewis’s book is that he gets his moral wrong. High-frequency trading doesn’t hurt the little guy, as Lewis claims; instead, it hurts the big guy. The explanation is this: people sitting at their desks buying 100 shares of Apple are getting the current ask, so mainly they care about volume and tight bid-ask spreads. Institutional investors, buy contrast, want to buy and sell huge blocks of shares, and they don’t want the price to move in the process; they are the ones being front-run by the HFTs. Felix Salmon pointed this out, and it’s the subject of an op-ed by Philip Delves Broughton today.

What this leaves out is the question of who ends up being harmed. To figure that out, you have to ask whose money we’re talking about when we say “institutional investor.” If it’s SAC Capital, meaning Steven Cohen’s money, then who cares? But most ordinary people invest—if they are lucky enough to have money to invest—through mutual funds (401(k) plans, for example, are largely invested in mutual funds), and those funds are among the “institutional investors” losing money to HFTs. Another big chunk of institutional money belongs to pension funds. In this case, if the pension fund does poorly, the money may come out of its corporate sponsor in the form of increased contributions—or it may come out of beneficiaries and taxpayers in the form of a bankrupt plan shifting its obligations to the PBGC. Then there are insurance companies: in that case, losses from trading affect shareholders, but if they are systemic across the industry they end up as higher premiums for consumers.

This is not to say that the institutional investors are warm and cuddly and are just passive victims in all of this. I’ve spilled enough ink inveighing against active asset managers, and Salmon points out that the buy side bears its share of blame for being careless with other people’s money. At the end of the day, if HFT harms other people in the markets, it’s just a fraternal spat among capital, and doesn’t affect the fundamental divide in the post-Piketty world. Until a poorly-tested algorithm goes berserk and freezes the financial system, that is.

13 responses to “Incidence

  1. Right, because “being front run” is the edge of a two headed coin, which in most cases these days is quite sharp.

  2. Here’s a news flash; People who do something every day, all day, will probably be more efficient at doing that thing than the occasional amateur who plays the game.

    I.e., the pros will buy at lower prices and sell at higher, caeteris paribus. Does anyone really believe that the little retail investor is getting a worse deal with today’s technology than when traders met under that buttonwood tree to exchange stocks.

  3. Well pat we already know that doing one thing and having that one thing pay for all your needs is not the way to go. Give a man a fish, feed him for a day. Teach a man to fish, feed him for a lifetime.

  4. And then there’s this study out of UMich (http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec38-wah.pdf) which finds that “market fragmentation and the presence of a latency arbitrageur reduces total surplus and negatively impacts liquidity.” Or as one of the co-authors put it in an article for the Guardian: “What we found may be even scarier than Lewis’s book-selling punchline.”

  5. Even if it doesn’t hurt the little guy as much as other big guys, high-frequency trading is bad because it reduces trust in the system. If little guys believe, it’s a rigged, unfair game, that psychological damage starts to eat away at our society.

  6. @Roger, nope it’s the gamers and their Koch-suckers that ARE already “psychologically” damaged and have been FREE to rape and pillage society

    AND

    “government” has been putting the boot on the throat of people WHO HAVE A RIGHT TO DEFEND THEMSELVES.

    Get it? By NOT going after war crimes, you could NOT go after their financial crimes since they ARE related!!!

    You haven’t been on the receiving end of “religious” revenge. I have. And get this – I never did anything to the kabal of batshit crazy Urantia Book’s UBITES who did all this from the UBRON website. CIA and FBI and NSA MUST know this and have the evidence. At what point does the protection of one “religious” minority actually become predatory persecution of the majority?

    REAL science can solve the STUPID math riddle:

    Shut them out of trading for ONE day and see what happens. Millions will return to the minimum wage earners’ personal bank accounts, if they still have one. But the goal there was to make sure you no longer HAVE a bank account – the extraction algorithm TAKES IT ALL. They use YOUR savings to throw you into poverty!!!!

  7. I’m sticking with the physics here, physics that was in unity with philosophy as mankind evolved into civilization.

    Time is distributed as “Now” through space.

    There better be a greekgeek symbol for that measurement – the Eternal “Now” – if there isn’t, make one up :-)

    So any slicing and dice-ing of time is a man-made invention. I would have wanted to steer my genius child away from being a packet of atoms ahead of the other guy as a way to profit from the wheels of civilization, but that’s just me. Home education works.

    Keep in mind I am detached from belief in what another believes – that conversation can not be ignored, in the final analysis. Culture is complex.

    But culture must have access to currency in order to survive. Man to land ratio.

    Swords into ploughshares, no one used to do it better. And back into swords again, no doubt, but it’s a balance that rests on many wheels of white-man civilization.

    Look at where the interesting jobs in one wheel went:

    http://rt.com/op-edge/russians-americans-nasa-cooperation-245/

    A seven year Presidency State of the Union message is “things take time” – IGNORING previous accomplishments of manufacturing like the building of weaponry for a big invasion in a brutal 3 year long raging war.

    Look at all the refugees from war wandering around the planet – millions who do not pick up the sword – from all ancient cultures and civilizations. That’s the “global economy”, is it not?

    You guys were so DISLOYAL to the well being of women as you swept up the targets on your list – the “threats” to the new world order. Savagery. Talk about your oxymoron……the new world order being savagery via the joystick…..

  8. That 4th place finish is nothing to brag about, barely gets a medal, no trophy, and not even a win, place, or show to be found. I would take a step back, or drop 5 yards and punt, cause you’re about to get tackled in the end zone, and at your age, that ain’t gonna feel so good.

  9. What an ambition a knuckle dragger like Anonymouse has, to have the biggest tree to swing from like a monkey….

  10. Who is going to “trust” the “system” now?

    More “appeasement”? (people who still have jobs walk around looking like zombies – you feel sorry for them) Because look at what they have the “power” to do to the “Annie”s in the world? How they do not stop coming after you once you “piss them off”….?

    LIARS. They had you on a list for economic genocide. Kill off the people after they gathered up the harvest…..

  11. I tried the orphan thing, but it didn’t stick.

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