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The Matrix, but with money: the world of high-speed trading

Bob Morris, on Jul 30, 2009, 8:15 am

dark pool

ArsTechnica explains the world of high frequency trading

Supercomputers pitted against one another in a high-stakes battle of attack and counterattack over a global network where predatory algorithms trawl the information stream, competing every millisecond to gain an informational advantage over rivals. It sounds like Hollywood fiction, but it’s just an average trading day on the stock market.

And you don’t stand a chance against them either. Not only does such trading hugely dominate the market, they get preferential treatment, early notification on trades about to happen, and just by their size, can move prices.

The article delves into what for most of us is arcana, iceberging, predatory algos, statistical arbitrageurs, and dark pools.

Dark pools, then, let traders completely sidestep normal stock and commodities exchanges in order to buy and sell assets without having to broadcast their desired price to the rest of the world.

Thus, they are not beholden to the trading rules the rest of us must operate under. If capitalism is supposed to be all about open and free markets, then dark pools clearly have nothing to do with capitalism and instead are just another way a tiny elite siphons money from the rest of us, seemingly above rules and the law.

Worse, such trading can clearly lead to market meltdowns.

On Black Monday (10/19/1987), all of the portfolio insurance programs started dumping assets in lock-step, in response to a particular set of inputs. This synchronized selling begat more synchronized selling, and by the time this giant, market-sized feedback loop was shut down by the closing bell, the Dow had lost almost 23 percent of its value in a single day.

The computerized trading systems of 1987 were slow-moving toys compared to what we have now.

Tags: , | Category: News | 6 comments - (Comments are closed)

  • http://www.radicalglasgow.me.uk John Couzin

    Who said capitalism is supposed to be about open and free markets? Capitalism is what it is, and is so because it is an organic type structure that grows and changes as conditions change. The only thing that remains the same is that it is a system where by a small elite make huge sums of money at the expense of the many. Anything else that happens is an accidental spin off. Any other idea of capitalism is not looking at its history.

    • http://polizeros.com Bob Morris

      Libertarians in particular favor open and free markets. It’s instructive that blogs, particularly ones with libertarian slants, were first to talk about subprime, and now Goldman Sachs and High Frequency Trading. Then it spread to mainstream media. Mish and Zero Hedge in particular are libertarian, and they’re pissed.

      Whether markets ever actually are free is of course another discussion.

  • http://www.radicalglasgow.me.uk John Couzin

    The workings of capitalism are not laid down by some supreme being, it will take the shape that suits the elite that control it and therefore will always work to suit that elite. When that stops happening there will be two blue moons in the sky.

  • http://www.AsymptoticLife.com DJ

    Is capitalism, as John suggests, a “system” perpetrated by the elites on the rest of us, or is it a means of economic relationship based on communities and mutually-dependent small businesses and laborers, too often (but never completely) coopted by corporations and governments? It’s both– and in fact both patterns (the small business economy and exploitation by elites) have existed independently for millenia.

    The problem with radical socialism (e.g USSR, etc.) in practice, as I see it, is that it tried to eliminate capitalism completely. But the urge to trade what I have for what I need existed long before money was invented– it’s part of human nature. And likewise the urge of the elites to benefit at the expense of the majority did not disappear just because capitalism was suppressed. “Meet the new boss, same as the old boss.”

    These are two separate, independent, but frequently coexisting phenomena– and these days they’re BOTH called capitalism. If you read Adam Smith, accumulation of massive wealth by the elites is inconsistent with a capitalist system. But if you read Ayn Rand, it isn’t.

  • http://www.radicalglasgow.me.uk John Couzin

    Capitalism was never supressed in the USSR, it was simply transfered to state capitalism. The workers were just the same wage slaves with no control over their industry and all decisions made centrally with the benefits being distributed according to those at central control. a monopoly, an excellent corporate capitalist model. there were of course some spin-offs like health service and free education, an education system that taught homage to the system. The model that modern westrn capitalism would like to hoist on us all.

  • http://www.AsymptoticLife.com DJ

    “The model that modern westrn capitalism would like to hoist on us all.”

    You mean Western coporatists. They’d love to stamp out the world of small business– which still engages half the U.S. and comes up with half the innovations.

    I, for one, am not a wage slave. I’m self-employed. The upside of the economic downturn is that more and more people are joining me, forced by the corporatists themselves to turn to their own resources. Not everyone is a success story– after 150 years, the entrepreneurial spirit is largely bred out of us. It took me years to finally become self-reliant in my own business.

    I now have several friends who are newly self-reliant, if working hard to remain so.

    BTW, I don’t have any full-time labor, but when I do hire, I make sure I pay better then the average wage even for the most menial work. That’s something I feel strongly about– I don’t have to be driven by the bottom line. As long as I’m putting food on my family’s table, I can help put food on someone else’s family’s table, too.