Friday, March 04, 2011

 

The fiberoptic war between traders who cash in electronic lag for dollars

I have a big problem with high frequency trading for two reasons.

1) It has decimated the human market maker. People cannot compete with machines so now the population of market makers are a couple of dozen financial/technology firms.

2) Machines cannot make markets as well as humans. I am convinced the flash crash of May 6th 2010 was caused by the few firms who make markets turning off their computers during a time of high volatility because they were afraid their algorithms couldn't handle it. What is better, a dozen computers or 100k+ humans making markets? Which are more likely to disappear from the market when the going gets tough?

The article I linked hints at a solution, put all the computers at the same disadvantage. There is a way to do this without physically changing anything. Put a limit on the number of packets going into the exchanges computers. The limit would be all data packets are stored for say 1.5 seconds then they are allowed into the server. Next batch does the same thing every 1.5 seconds.

Another idea I would like to see one exchange open up with stocks priced at $0.05 increments instead of one penny.

If nothing is done the stock market is going to see a lot more volatility and there will likely be a point that the computers will fail again and this will be when the markets are falling. Down 500 points in 5 minutes is a warning we should heed.

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