High Frequency Trading, Just a Reminder

high frequency tradingSeldom are the real reasons for things discussed in the media or anywhere else. The damage to the economy, done by high frequency trading firms is never discussed in the media or in academic circles.

Here are the facts.

It is not the speed of high frequency trading firms that puts investors at a disadvantage. Their speed is a function of these firms competing with one another. The faster a firm trades the more efficient it is in exploiting the unsuspecting behavior of the public, hedge funds, investors and traders of all kinds.

The only true advantages these firms have is that they are not bound by the constraints of existing securities laws. What we have is the equivalent of making robbery legal for an anointed set of citizens. That happens also, but folks are not aware of it.

No one has stated outright the high frequency trading firms are above the law. They don’t have to. Regulators simply fail to notice. Individual investors are sometimes prosecuted for spoofing. For high frequency trading firms spoofing is a constant trading technique from the open to close of trading.

High frequency trading firms and lawmakers have compatible goals so manipulation is overlooked as long as the result is higher stock prices. This puts all other traders at a disadvantage because they lose all objective criteria for studying price movements. Both fundamental and technical analysis become useless with respect to decision making.

The disadvantage to equity buyers and sellers is obvious. The general public suffers even more but for reasons that are not automatically grasped. Biggest of all are the changes in the incentives that govern the actions of the upper 1%. When all one has to do to get paid is run up the price of owned assets without respect of profits, the rich become lazy. Innovation and effort by the wealthy become highly subdued. Welfare for the rich has the same effect on the rich as it does on the poor. It reduces the incentive to do anything productive.

I mention these things today because we are on the cusp of an era where everyone together will suffer greatly as a result of years of abusing the financial markets. It is important that blame be correctly placed because someone will be blamed regardless.

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About Fantasy Free Economics

James Quillian independent scholar,free market economist,and teacher of natural law. Who is James Quillian? Certainly I am nobody special, Just a tireless academic and deep thinker. Besides that, I have broken the code with respect to economics and political science. Credentials? Nothing you would be impressed with. I am not a household name. It is hard to become famous writing that virtually no one in the country is genuinely not in touch with reality. But, if I did not do that, there would be no point in my broking the broken the code. If you read the blog, it is easy to see that there are just a few charts, no math and no quantitative analysis. That is not by accident. Given what I know, those items are completely useless. I do turn out to be highly adept at applying natural law. Natural law has predominance over any principles the social science comes up. By virtue of understanding natural law, I can debunk, in just a few sentences , any theory that calls for intervention by a government. My taking the time to understand the ins and outs of Keynes General Theory is about like expecting a chemistry student to completely grasp all that the alchemists of the middle ages thought they understood in efforts to turn base metals into goal. Keynesian theory clearly calls for complete objectivity. Government can only make political decisions. Keynesian techniques call for economic decisions. So, why go any further with that? Fantasy Free Economics is in a sense a lot like technical analysis. Technical analysis began with the premise that it was impossible to gain enough information studying fundamentals to gain a trading advantage. Study the behavior of investors instead. Unlike technical analysis, I don't use technical charts. What I understand are the incentives of different people and entities active in the economics arena. For example, there is no such thing as an incentive to serve with life in the aggregate. In the aggregate, only self interest applies. It is routinely assumed otherwise. That is highly unappealing. But, I am sorry. That is the way it is. I can accept that because I am genuinely in touch with reality. Step one in using Fantasy Free Economics is for me to understand just how little I really know. A highly credentialed economist may know 100 times what I do based on the standard dogma. Compare the knowledge each of us has compared to all there is to know and we both look like we know nothing at all. There is always more than we don't know than what we do know. I am humble enough to present myself on that basis. Why? That is the way it is. I am not bad at math. I have taught math. What I understand is when to use it and when to rely on something else. Math is useless in natural law so I don't use it. While others look at numbers, I am busy understanding the forces in nature that makes their numbers what they are. That gives me a clear advantage.
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