Scientific Proof That High Frequency Trading Induces Adverse Changes In Market ......

Zerohedge ^ | 07/12/2010 23:46 -0500 | Tyler Durden

[Ernest_at_the_Beach]

Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question

Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of  seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise  models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism.

[Ernest_at_the_Beach]

The paper is, needless to say, a must read for everyone who has an even passing interest in stock trading and market regulation (alas, yes, that would mean the SEC, and Congress).

[Gaffer]

Short for saying computers fudge up the natural trends. The fault with these programs is that humans write them.

[Ernest_at_the_Beach]

I just stumbled onto this while looking at BP ‘s stock history.

[who_would_fardels_bear]

I don't want anyone to label me a socialist.

So if a sufficient number of companies can bribe ... er make political contributions ... to a sufficient number of congressmen to keep HFT legal, then I'm all for it!

After all, if we make HFT illegal in American then every single investment company will move all of their business somewhere else, and only those places will gain the benefits of investment bubbles.

[SeekAndFind]

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---

Additional Information
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[Eyes Unclouded]

Must respectfully disagree sir. Even as unfair as the trading system is now given the state of Congress, and the SEC, the less they act the better things will be.

[SeekAndFind]

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[jiggyboy]

if we make HFT illegal in American then every single investment company will move all of their business somewhere else, and only those places will gain the benefits of investment bubbles.

No, just the crooked ones. And if by "the benefits of investment bubbles", you mean 15% unemployment / underemployment, crashed home prices yet relatively few available for sale, etc., then they're welcome to them.

BTW, the "everybody will move business elsewhere" canard was a little threadbare slightly before sweatshops were outlawed in the early part of the 20th century.

[Ernest_at_the_Beach]

Wish I were younger.

[Gaffer]

Yes, a lot of good analytical and technical/programming skills that could be put to better use. In the end, the results most certainly are empirically tracked (by the profit) which spurs modifications to ‘improve’.

There's a certain principle by Heisenberg regarding uncertainty. Eventually, the scale of measurement/assessment is affected by the inability to separate the ‘measurement’ method from the ‘thing’ to be measured (e.g., resulting in feedback, error in measurement, influence of data, etc.)

[LomanBill]

Hos 12:7-9
7 The merchant uses dishonest scales;he loves to defraud.
8 Ephraim boasts,"I am very rich; I have become wealthy.With all my wealth they will not find in me any iniquity or sin."

9 "I am the Lord your God,[who brought you] out of Egypt; I will make you live in tents again,
as in the days of your appointed feasts.
NIV

 

It is incumbent upon the honorable craftsman to be aware

of whether or not his services are being used

as a means to accomplish evil ends -

and to act accordingly.

[Ernest_at_the_Beach]

Also by R.Smith:

The Spread of the Credit Crisis: View from a Stock Correlation Network

[Ernest_at_the_Beach]

Hmmm:

Who's Bouchet? Who's Franklin?

[DManA]

You can’t profit from short term fluctuations in the stock market anyway, and none of this effects long term moves, so I say this is irrelevant to anyone outside the big financial institutions and academia.

[Ernest_at_the_Beach]

Edward Alexander Bouchet

[Frantzie]

HFT and hedge funds are just like the 1920s era “investment pools” or manipulators which included Joe Kennedy.

HFT can also be used to take over govts - see the late summer of 2008. The public has no clue.

[super7man]

Sarcasm tag?

[who_would_fardels_bear]

Did I really need to add /sarc after my comments?

[jiggyboy]

TBTF disinformation agents are clearly at work on FR on this matter. They tend to use some pretty facile arguments but not as parody, so yeah you got me. “Topquark” was beyond obvious here
http://www.freerepublic.com/focus/news/2540454/posts
but there was some here as well
http://www.freerepublic.com/focus/f-news/2538130/posts

[DManA]

Nope.