High Frequency Trading has inherent problems

Really, what could go wrong in the Trading Matrix? Move along now, everything is fine.
Really, what could go wrong in the Trading Matrix? Move along now, everything is fine.

HFT can and does destabilize markets, like when an algo goes haywire or all the trades trend one way for no apparent reason. This is one reason I’m not trading much now, or even buying long-term. The markets, to a retail investor, no longer make sense. That’s because the vast bulk of daily trades are HFT, which is massive volume in microseconds. It cares not about technicals or fundamentals. There’s no way anyone else can hope to trade or invest with any hopes of a rational market.

Another problem is that the favored justification for HFT, that it provides liquidity, is deliberately misleading. HFT only provides liquidity for the other big traders, who also get to ignore rules and have advance info on coming trades. How convenient for them.

The biggest problem though is what happens when one of those six standard deviation events that models clearly show can never happen, actually happens. Then HFT will go bonkers and markets will melt down.

Like with LTCM in 1998

However, its enormously leveraged gamble with various forms of arbitrage involving more than $1 trillion dollars went bad, and in one month, LTCM lost $1.9 billion. On the precipice of not only an American financial disaster, the fund’s imminent collapse had significant international monetary implications, jeopardizing the financial system itself.

Zero Hedge covers the problems with HFT in detail.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.