Happy Hour: Has HFT Rigged The Market?

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Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.

HFT

A media storm erupted this week because of the 60 Minutes story – Rigged and the release of a new book by Micheal Lewis. Once again, headlines make drastic claims about the market and your money.

What’s the best way to sell a book? Get a 60 Minutes infomercial and make bold statements about how Americans are getting ripped off.

Kidding aside, people are always looking for an advantage. It’s human nature. History is repeating itself for the thousandth time. Only this iteration is computerized.

As is typical, the real issues get lost in all the hype. Computers get a bum rap. After the past two decades, it’s safe to say computers have changed things for the better.

But it’s not perfect. The problem is twofold:

  • Technology pokes holes in antiquated rules
  • Code has flaws

There are others, but those two seem biggest to me.

Rules don’t change fast enough even with known problems. When the current rules allow people an advantage, of course some will jump at the chance. That’s human nature.

Obviously, there’s enough money to be made that big sums are spent for this advantage. But how many are jumping? How many of those are nefarious vs legit? How much risk is added to the market because of this?

I doubt there’s a solid answer to all those questions. I know some people behind the code, these algorithms, are corrupt. But not all of them.

I know code is flawed. How many times have you dealt with bugs, patches, updates, or viruses in the past year? It happens so often we don’t question it.

There are smarter people than me behind the software we use. What does that say about similarly smart people coding HFT algorithms? Smart does not mean perfect. At some point bad code will cause problems in the system. It’s guaranteed.

Last Call

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