My bottom line is that HFT is a black box which very few people understand, and that one thing we’ve learned over the course of the crisis is that if there’s a financial innovation which doesn’t make a lot of sense and which is hard to understand, there’s a good chance there’s systemic risk there. Is it possible that HFT is entirely benign and just provides liquidity to the market? Yes. But that seems improbable to me.
How big is high-frequency trading?
To put it another way, I don’t think people are making billions of dollars in profit just by being fast. But there are definitely people making billions of dollars in profits through strategies for which being fast is a necessary precondition
This is why I’m sympathetic to Paul Wilmott’s view of all this: there’s simply too much complexity here for comfort, and too many things which can go wrong. When the stat-arb shops imploded in the summer of 2007, the systemic consequences were mild-to-nonexistent, and that does provide a certain amount of reassurance. But we can’t be sure that if and when such a thing happens again, the consequences won’t be much worse.
One of the largest sources of campaign contributions to Senate Democrats during this year’s health care debate is a physician-owned hospital in one of the country’s poorest regions that has sought to soften measures that could choke its rapid growth.
According to the Times, the hospital has been quite successful in its efforts. And where is this powerful hospital with all the lobbying money located? Why in the metropolitan area of McAllen, Texas. McAllen, Texas? Hmmm…now where I have heard that name before?
While some index and ETF proponents avoid this extreme absurdity with lower fees, roughly 90% of the $1.5 trillion in 401(k) and other defined contribution assets in mutual funds are in actively managed offerings with expenses close to 1%. Paying for those potions during an era of asset appreciation with double-digit returns may have been tolerable, but if investment returns gravitate close to 6% as envisaged in PIMCO’s “new normal,” then 15% of your income will be extracted based on the beguiling promise of Madame Rue.
My “new normal” construction from many months ago has apparently now become the property of PIMCO, which is fine by me. The bond manager’s Bill Gross offers in his latest note that the new normal means there is zero chance we will get back to the historical “norm” of 5% maltese falconGDP growth, and I agree.
An upside to the decline in worldwide copper prices from recent peaks is that copper thefts are slowing, least in southern California. People are apparently no longer cutting power lines, stealing piping or blowing up irrigation systems, all of which were happening regularly at the peak.
via Copper Theft Slowing.
But now as those markets have corrected to a considerable degree, foreclosure activity is now starting to be a function of increasing unemployment.
via naked capitalism: Unemployment, Not Bubble Unwind, Starting to Dominate Foreclosure Activity.
IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history.
But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.
via For Mortgage Servicers, an Incentive Not to Help Homeowners – NYTimes.com.
I’m not a believer in the strong versions of efficient markets hypotheses, so I do admit that high-frequency trading, like just about every other trading strategy, can bring short-run “whiplash” effects on market prices. But if you don’t like it, you can trade yourself at much lower frequencies, which is probably what you should be doing anyway. At the same time high-frequency trading smooths out or shortens many other cases of price whiplash. High-frequency trading brings more liquidity into the market. Call it “low quality liquidity” if you wish, but it still looks like net liquidity to me.
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