Everything You Need to Know About High-Frequency Trading

[MindMover]

The stock market isn't rigged, but it is taxed.

It always has been. As Justin Fox points out, for as long as people have been trading stocks, there have been middlemen taking a cut of the action. Now, that cut has gotten smaller as markets have gotten bigger and more technologically-advanced, but it's still there. It's the implicit fee that intermediaries charge for making sure there's a buyer for every seller, and a seller for every buyer—for "making markets."

But there's a new kind of middleman today. They don't work at stock exchanges or banks. They work at hedge funds, and trade at whiz-bang speeds. These "high-frequency traders" (HFT) use computer algorithms—a.k.a., algobots—to arbitrage away the most infinitesimal price discrepancies that only exist over the most infinitesimal time horizons. You can see just how small and how fast we're talking about in the chart below from a new paper by Eric Budish and John Shim of the University of Chicago and Peter Cramton of the University of Maryland. It uses 2011 data to show the price difference between futures (blue) and exchange-traded funds (green) that both track the S&P 500. These should be perfectly correlated, and they are—at minute intervals. But this correlation disappears at 250 millisecond intervals, a little more than half the time it takes to blink your eyes. This is the "inefficiency" that HFT makes less so.

http://www.theatlantic.com/business/archive/2014/04/everything-you-need-to-know-about-high-frequency-trading/360411/

[mindwalker_i]

1. 250ms is a quarter of a second

And it don't take no half-second to blink an eye. I think they're off by a factor of 10 - they're thinking 25ms.

That aside, this article makes a good point. HFT is just a way to skim some money off of the people who do actual work. Like a tax, it's a certain percentage, but unlike a tax, we don't get squat for it. No roads, no police or other emergency services, no other infrastructure. We just get owned.

[bemildred]

2. It's a racket, a way to game the system, and they know perfectly well it is too.

Traders approach the markets in the same way gamblers approach Vegas.