Putting high-frequency trading into perspective.
Technology is critical to today’s financial markets. It’s also surprisingly controversial. In most industries, increasing technological involvement is progress, not a problem. And yet, people who believe that computers should drive cars suddenly become Luddites when they talk about computers in trading.
There’s widespread public sentiment that technology in finance just screws the “little guy.” Some of that sentiment is due to concern about a few extremely high-profile errors. A lot of it is rooted in generalized mistrust of the entire financial industry. Part of the problem is that media coverage on the issue is depressingly simplistic. Hyperbolic articles about the “rogue robots of Wall Street” insinuate that high-frequency trading (HFT) is evil without saying much else. Very few of those articles explain that HFT is a catchall term that describes a host of different strategies, some of which are extremely beneficial to the public market.
I spent about six years as a trader, using automated systems to make markets and execute arbitrage strategies. From 2004-2011, as our algorithms and technology became more sophisticated, it was increasingly rare for a trader to have to enter a manual order. Even in 2004, “manual” meant instructing an assistant to type the order into a terminal; it was still routed to the exchange by a computer. Automating orders reduced the frequency of human “fat finger” errors. It meant that we could adjust our bids and offers in a stock immediately if the broader market moved, which enabled us to post tighter markets. It allowed us to manage risk more efficiently. More subtly, algorithms also reduced the impact of human biases — especially useful when liquidating a position that had turned out badly. Technology made trading firms like us more profitable, but it also benefited the people on the other sides of those trades. They got tighter spreads and deeper liquidity.
Cyberwarfare needs to be framed far more broadly.
When we hear the term “cyberwarfare” we think of government-backed hackers stealing data, or releasing viruses or other software exploits to disrupt another country’s capabilities, communications, or operations. We imagine terrorists or foreign hackers planning to destroy America’s power grid, financial systems, or communications networks, or stealing our secrets.
I’ve been thinking, though, that it may be useful to frame the notion of cyberwarfare far more broadly. What if we thought of JP Morgan’s recent trading losses not simply as a “bad bet” but as the outcome of a cyberwar between JP Morgan and hedge funds? More importantly, what if we thought of the Euro’s current troubles in part as the result of a cyberwar between the financial industry and the EU?
When two nations with differing goals attack each other, we call it warfare. But when financial firms attack each other, or the financial industry attacks the economy of nations, we tell ourselves that it’s “the efficient market” at work. In fact the Eurozone crisis is a tooth-and-claw battle between central bankers and firms seeking profit for themselves despite damage to the livelihoods of millions.
When I see headlines like “Merkel says Euro Rescue Funds Needed Against Speculators” or “Speculators Attacking the Euro” or “Banksters Take Us to the Brink” it’s pretty clear to me that we need to stop thinking of the self-interested choices made by financial firms as “just how it is,” and to think of them instead as hostile activities. And these activities are largely carried out by software trading bots, making them, essentially, a cyberwar between profiteers and national economies (i.e. the rest of us).
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