Lessons from Groucho

11 Aug
Upon hearing that our site was going to be syndicated by the good folks at The Business  Insider I was a bit tentative having remembered the famous resignation telegram of Groucho Marx “I just don’t want to belong to any club that would have me as a member.” By no means am I looking to tear down TBI, I am a fan of the vast majority of their writers, appreciate the speed at which they push content, and find their model effective for aggregating while still maintaining a voice.  Due to the sheer volume of pieces republished though, I occasionally come across an article that I am amazed would make it past the desk of a kindergarten teacher, let alone a widely read business publication.  I know that headlines like “High Frequency Trading Is Poison In The Bloodstream Of Markets is a great way to get traffic and that’s what keeps the lights on, but publishing a piece of nonsensical blather full of undeveloped ideas and glaring inaccuracies cannot be good for business in the long term.

It starts off with the authors thoughts on human nature in respect to trading, his experience studying technical analysis, youtube, his grandfather; all harmless and pedestrian observations.

What really stuck out to me though, was the fifth paragraph.

High-frequency trading was developed in the early 2000’s by teams of computer software programmers and mathematicians. The goal was to be able to shave off a fraction of a second (and at the same time, add to the price a fraction of a penny) to an electronic market order for a stock that was either being bought or sold by a retail investor using his online brokerage account, and then do repeat the transaction millions of times a day. Since then, high-frequency trading has come under direct assault from the Securities and Exchange Commission, advocacy groups, and finance journals like Money Magazine in full-spread feature articles and cover stories.

The first sentence, is blatantly false.  High frequency trading has been around since the 1970’s if one is referring to program trading, or the early 1980’s at the latest if one is referring to its more proprietary models, which were came into their own at RenTech.

Sentence two, again no regard whatsoever for facts.  Since HFT clearly predates the use of online brokerage accounts by retail investors that cannot be the case.  Additionally, since the space time continuum is yet to be conquered by man, the idea that HFTs are shaving time off of orders does not make sense.  One more for good measure; since a market order is a market order and as such has no price it is impossible to add or subtract from it.

It continues

But we still haven’t got it yet. The controversy is based on the existence of an uneven playing field; that high-frequency traders have unparallel access to market inefficiencies and expose pricing vulnerabilities in a profoundly successful manipulation of liquidity.

Gives no explanation of this manipulation of liquidity simply states is as fact, and unparallel is not a word.

Followed by

As a result, it’s the retail investors that think just because they’ve made a few hundred bucks since they’ve started “day-trading” that they are indestructible experts. This dangerous mentality is so far from reality that maybe the only way we will all learn from the dangers in allowing the gap between the investment haves and have not’s is to actually experience them.

How does HFT make the retail investor “a few hundred bucks”, and why is this the HFTs fault that retail investor has irrational feelings?

It then it goes on to “flash crash” discussion blaming HFT and dark pools , which I will not get into as my thoughts on the matter have already been established here: Flash Crash

Closes with this: I’ve got a feeling we haven’t seen the end of the high-frequency trading poison seeping into the bloodstream of our worldwide economic and financial markets, and I’ll prefer to keep my distance.

Although there has been no evidence presented to the poison thesis, he has a feeling we have not seen the last of it.  So the author who proclaims he wants to work in financial markets at an investment bank or a hedge fund, wants to keep away from HFT. I wish him the best of luck and would advise him never to trade anything ever because otherwise it is unavoidable.

A populist rant headline may get more eyeballs to the page and it is an easy target when your subject is a faceless black box liquidity provider, but I find it hard to imagine that a few clicks today warrants the suspension of reason or truth as important factors in the content you distribute.

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2 Responses to “Lessons from Groucho”

  1. Anal_yst August 12, 2010 at 6:11 pm #

    I’ve never heard of the author of the BI article so can’t question his qualifications to write such a post, but its pretty clear that he either didn’t take the time/effort to find facts to support his arguments or can’t, presumably because they, uh, don’t exist. I’ve said some stupid crap in my day, but I at least try to find support and link to it in the article, and unless a comment is totally off base, try to avoid getting defensive, as herr Copeland did in response to comments. C’est la vie, eh?

  2. Danny Black October 8, 2010 at 2:37 pm #

    I think he means unparalleled.

    “Me fail english… thats unpossible!”

    Also really depends what you mean by HFT. The models RenTech were using back then were not really terribly high frequency more stat arb, ie maybe mathematically driven and executed by computer but not terribly frequently.

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