Tuesday, March 04, 2014

 

High-Speed Trading Isn't About Efficiency—It's About Cheating

I am not going to quote from the article from which the title is taken but rather the blog which discussed it because the blog had a better understand of the frailty HFT has introduced into the stock market and better solutions than  MOAR taxes. 

A frightful concern I've had for a long time is that if there is another steep stock market selloff, the HFT players will withdraw their bids and go flat on all positions.  Since the Specialist system is gone, there will be no one else left to make a market in stocks that are crashing.  I expect any stock market decline to be exacerbated by margin calls on over leveraged players.  If you divide the record high margin debt by the decreased volume of today (40% of what it was in 2007), this has the making of a lot of forced liquidation of stock with few or no institutions willing to take the buy side.   (Victor adds that computerized re-allocation of institutional assets from stocks to government bonds may also play a role in steepening any stock market decline).

 40%?  Wow.  HFT has destroyed liquidity not enhanced it.  In the next bear market we could see some serious vacuums where there is no trading on the way down.  

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