The Wall Street Journal reports on the high frequency traders and their potential impact on the market yesterday, especially exacerbating an already down trend.
A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff. Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points...Tradebot's system is designed to stop trading when the market becomes too volatile...
The problem is that these trades, rapid in and out trades, are predicated on three things; (i) the market is somewhat sticky and does not exhibit Wiener process independence, there is a correlation, albeit short term, and if a stock is going up it may continue to do so and if down then likewise, (ii) transaction costs are de minimis, (iii) proximity to the points of trade are critical since the correlations times are in nano seconds.
The problem is that no one knows the elements of instability in such a system or call it a game. They all have unstable modes, as we have noted many times before. You can optimize the linear modes but the nonlinear issues lead to instabilities, and all too often the whiz kids forget them, look at Long Term Capital.
We feel that high frequency trading, led by good old Goldman Sachs and their ilk, will sooner than later crash the entire market. 2008 will look like the good old days!
A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff. Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points...Tradebot's system is designed to stop trading when the market becomes too volatile...
The problem is that these trades, rapid in and out trades, are predicated on three things; (i) the market is somewhat sticky and does not exhibit Wiener process independence, there is a correlation, albeit short term, and if a stock is going up it may continue to do so and if down then likewise, (ii) transaction costs are de minimis, (iii) proximity to the points of trade are critical since the correlations times are in nano seconds.
The problem is that no one knows the elements of instability in such a system or call it a game. They all have unstable modes, as we have noted many times before. You can optimize the linear modes but the nonlinear issues lead to instabilities, and all too often the whiz kids forget them, look at Long Term Capital.
We feel that high frequency trading, led by good old Goldman Sachs and their ilk, will sooner than later crash the entire market. 2008 will look like the good old days!
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