Weekend Wars: Traders vs. Funds

10/4. To military and police personnel, an affirmative acknowledgment. To investors and traders, the potential boiling point of a slow simmering feud. On this date, several high powered mutual-fund executives will convene at the Investment Company Institute in Washington D.C. and reportedly begin a push to shackle high-frequency traders .

A bit under two years ago I sat down with a few Chicago options traders. Most were joyous of the paydays they were seeing as a result of the panic. One elderly gent, had a whole different take on the situation, however. Here's what he had to say:

What it's gonna come down to is somebody's gonna have to pay all this back in blood. They're not gonna stop until they have their bad guys hanging from the gallows. It's you boys, the ones that played it smart... when the dilettantes were playing craps. You are the ones they're gonna come after.

Mind you, the gentleman in question is a true old time trader. In fact, he's the sort of person who fondly references Fisher Black and Myron Scholes as "those kids that made it about the numbers".

His voice, however, does speak for a silent but powerful minority. They are the modern day hunters and gatherers, the rebels with a very distinct cause. Wrapped up and packed up in bland offices, hidden behind bespectacled exteriors, with controlled expressions and reserved demeanors.

The alphas of our time. The market shakers.

On the other side, we have the large institutional funds. The market makers (and movers).

Representing the interests of pension funds, unions and individual investors, these fiscal behemoths pack an enormous punch, but are very slow and sluggish. Often their ability to move in and out of positions can be hampered, affected, even ruined by garrisons of smaller, quicker, "rogues".

Their side of the argument is that high-frequency traders have an unfair advantage and are able to pick-off loose fragments of data leakage and use them for personal gain.

This side also alleges that such scenarios directly favor the short-term trader over the long-term investor and have a negative effect on the financial picture.

We have certainly heard quite a bit about "speculators ruining the economy" over the past two years.

Is this true? Or is this another scary case of a repetitive lie mutating into the truth?

The speculator is the life blood of any market based system, whether we are talking about a swap-meet in the Third World or a high-frequency market on Wall Street or off Wacker Drive.

Risk and return are two sides of the same coin. One doesn't exist without the other. High frequency traders have long been whispered about as the real culprit in waiting, it seems as though the curtain is ready to go up on the latest act of our play...

Comments (8)

Sep 26, 2010

High frequency trading is revenge of the nerds via taking the bullies 401k down 50%

Sep 26, 2010

Perhaps when there was one or two firms doing it, HFT did provide some liquidity, but now that there are so many of them, they have become a cancer to the system. There liquidity is only around when the market is doing well, but the second something major occurs their "shadow" liquidity is gone. What is worse, is that there is too much of a risk of a huge market meltdown caused by their systems. Didn't a newspaper accidentally report that an airline was going out a business and its stock dropped like 35% in five minutes even though the report was false?

Sep 26, 2010
Gekko21:

Perhaps when there was one or two firms doing it, HFT did provide some liquidity, but now that there are so many of them, they have become a cancer to the system. There liquidity is only around when the market is doing well, but the second something major occurs their "shadow" liquidity is gone. What is worse, is that there is too much of a risk of a huge market meltdown caused by their systems. Didn't a newspaper accidentally report that an airline was going out a business and its stock dropped like 35% in five minutes even though the report was false?

So what that was probably hedge funds dumping positions ..if you owned millions in company in stock and heard it was going bankrupt you would be a moron not to sell their shares asap

Sep 26, 2010
Gekko21:

What is worse, is that there is too much of a risk of a huge market meltdown caused by their systems. Didn't a newspaper accidentally report that an airline was going out a business and its stock dropped like 35% in five minutes even though the report was false?

Are you sure it is "their systems" causing the risk? You are talking about United (airline story), I believe. In regards to the large losses that can occur...isn't this an issue for the exchanges to address internally? Commodity markets have maximum daily loss limits, why don't securities markets? I'm not saying that there isn't truth in what you wrote, I'm just curious how long the broken toaster can blame the bread for coming out charred?

Sep 26, 2010
Midas Mulligan Magoo:
Gekko21:

What is worse, is that there is too much of a risk of a huge market meltdown caused by their systems. Didn't a newspaper accidentally report that an airline was going out a business and its stock dropped like 35% in five minutes even though the report was false?

Are you sure it is "their systems" causing the risk? You are talking about United (airline story), I believe. In regards to the large losses that can occur...isn't this an issue for the exchanges to address internally? Commodity markets have maximum daily loss limits, why don't securities markets? I'm not saying that there isn't truth in what you wrote, I'm just curious how long the broken toaster can blame the bread for coming out charred?

this is inherently flawed... crude oil futures arent fraudulent nor can they have been cooking their books/wells for years to make them worthless

Sep 26, 2010
Gekko21:

Perhaps when there was one or two firms doing it, HFT did provide some liquidity, but now that there are so many of them, they have become a cancer to the system. There liquidity is only around when the market is doing well, but the second something major occurs their "shadow" liquidity is gone. What is worse, is that there is too much of a risk of a huge market meltdown caused by their systems. Didn't a newspaper accidentally report that an airline was going out a business and its stock dropped like 35% in five minutes even though the report was false?

it went from 13 or 11 bucks down to 2 bucks then snapped back up.. chicago tribune.. tons of guys at my firm lost cash on that trade, usually they will break 'erroneous' trades but this was a result of the newspaper reporting fake news (which there isnt a penalty for apparently) not because of the HFT per se

Sep 26, 2010

If I am a shareholder and the company I own is "rumored to be bankrupt" but I beleive that is total BS. Why do I care if some computers beat down the stock? I would just double-up at the lower price, and then those computers get their asses handed to them.

Sep 26, 2010
Comment

Pages