High-Frequency Trading may increasingly destabilize the market

So says legendary quant trader Paul Wilmott in the NY Times today.

Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care.

That, in a nutshell, is the problem both with HFT and the amoral, thuggish environment of hedge funds and investment banks. They don’t care what or who they damage as long as they make money. Which makes them a clear and present danger to society and the economy.

Zero Hedge

His piece is a stunner – in summary, and in agreement with what Hedge discussed at length many months ago (we suggest readers familiarize themselves with this ZH piece as it is the one that started it all, and also explains partially our fascination with VWAP), Paul sees HFT as a force that is tantamount to what index arb and “dynamic portfolio insurance” was in the crash of 1987.

Yes, it was Zero Hedge, a blog, that started the investigation into HFT, which has now spread to major mainstream financial media and Congress. The problem with HFT are multiple, HFT traders get unfair advantages compared to the rest of us, monopolize the markets, increasingly have driven out long-term investors and small traders (like me), and most alarming, tend to trade in unison, so unexpected fluctuations in the market will have a greatly magnified effect. Like when (not if) they all try to get out at once.

  • Boiled down to ones and zeros, it’s frontrunning even if only by nanoseconds- putting your personal interest, or that of your employer, ahead of your contractual commitment to your client.

    I’m pretty sure that’s a RICO offense.

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