High-Frequency Drama

Man, high-frequency trading just can’t catch a break. Right on the back of Europe saying they wanted to “protect the markets” from high-frequency trading, or HFT, U.S. regulators want access to the secret sauce behind HFT strategies. As far as we know, the majority of this action has pertained to stock traders, but who knows when it could creep into futures markets?

In our piece covering the future of Chicago’s famed trading pits, we discussed how HFT has impacted the evolution of the trading floor and will continue to do so. But HFT frequently becomes the scapegoat, no matter where you look, if things are going poorly (and what about the swings to the upside, huh?).

Case in point? The recent op-ed by Doug Kass- author, pundit, finance professional- vilifying HFT as, quite literally, “The Newest Financial Weapons of Mass Destruction.” As he puts it:

The toxic combination of price momentum-based high-frequency trading strategies and the proliferation of leveraged ETFs has served to launch the newest forms of financial weapons of mass destruction, and they’re alienating legions of investors.

Computers don’t sleep, don’t get tired, don’t care about politics or fundamentals and don’t vacation in late August in the Hamptons or on the Jersey Shore — they just wreak havoc on our marketplace by amplifying moves on the upside and on the downside (as they did in the last hour of trading yesterday).

To what extent could Kass be right? Frankly, it may be too early to tell. HFT has obviously changed the trading landscape substantially. The obvious example that everyone cites is the flash crash in stocks we saw last May, but even in futures trading, there are rumbles of concern. Some of the short-term managers we speak with who deal in stock indices, currencies, bonds and other highly liquid markets say the surge in activity has created an odd environment where the intraday volatility is greater than the longer term volatility at times. We feel that way ourselves some days- like the market simply goes volatile for a session, and then goes quiet the next. In the past, a volatile stock markets session was usually the harbinger for more volatility ahead. Nowadays, it may just be a HFT model gone berserk (or making a killing).

In our our recent piece on the pits, long time S&P futures veteran  Danny Riley pointed out that there may be too much electronic trading taking place in futures right now.

Perhaps we’re simply nostalgic for the slower pace of days gone by. Unfortunately for those longing for those leisurely times, to borrow from Dan Patrick- when it comes to HFT, you can’t stop it. You can only hope to contain it. Can the regulators contain it?  Who knows? But seeing how they have handled the banks and other items, we have our doubts.


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