Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
This idea that things should be slowed down doesn't make much sense. What would be an acceptable time tic for the stock market? And why not half of that, or double that?

Moreover, distinguishing humans from machines/algos is not a useful idea either. Where does the human end, and the algo begin? If the computer performs sanity checks on human transactions, does that count as humand or algorithmic? If the human is tired of doing the same thing every day, and feels a simple program might automate much work, does that count as human or algorithmic? If the program becomes so complex and powerful that it represents the distilled knowledge of a roomfull of experts, does it count as human or algorithmic?

Like the atomic bomb, there's no point in hoping to turn back the clock. Computers exist, and they are fast, and they are expertly programmed.

Where there is an argument I think is in asking what conditions are needed to ensure that markets reflect their purpose. For example, hedging theory uses ideas of non-anticipating processes, ie processes which literally cannot depend on future events in a technical sense. All of derivative pricing is built on that idea, so that if you drop the non-anticipatory requirement, then the world that is implied does not behave in a "known" way, ie the theoretical justifications proposed by economists and marketeers do not apply. In this way, it makes sense to outlaw HFT, not because computers are too fast, but because the market as we know/expect it breaks down because of it.

As another example, one might argue that markets must have a minimum size in terms of numbers of interacting agents. Any technological or legal process which creates an effectively smaller market size should be outlawed, because the minimum size guarantee of purpose is not ensured. This is in effect what the argument about people vs computers boils down to. In HFT, too few interactions between agents exist, because the bulk of market participants (including all humans and some computers) cannot act/react in this timeframe. Conversely If everybody used computers which can act/react in milliseconds or less, then the size of the market during the HFT timeframe would increase, and this would guarantee the purpose of the market. In this scenario, there would be no realtime human actors, but that clearly wouldn't matter.

$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Wed Jul 29th, 2009 at 05:18:34 AM EST

Others have rated this comment as follows:

melo 4
Gringo 4


Top Diaries

Occasional Series