Sunday, July 26, 2009

Real HFT Issue

Most of the stuff I have been reading about High Frequency Trading has it being both predatory and parasitic. As always the greater media and blogesphere is missing the point. Wall Street and global financial markets both on the equity/credit side is predatory and parasitic by nature. Its always been that way and will always be this way in the future. The bigger point is the point I made in my most previous post.

Where I state:

"But like Skynet, they got better, faster, leaner, smarter, more complex,and even more dangerous. It seems like some sort of massive quantum leap has occurred just this year in their use and leverage. When the inevitable downward spiral commences again ,will we see some sort of colossal meltdown that makes the events after Lehman's collapse seem like a walk in the park".

Everything is a conspiracy theory, I understand that, that's what sells.

But the real story here is that these programs are highly scalable, unbelievably complex and use tremendous leverage to execute trades in an ultra low latency environment. This is precisely the type of strategy that got us in this grand mess in the first place. What will happen with these HFT programs when things go bad again? The only ones buying at the moment are the programs, so the only ones selling will be the programs correct? NO! That's the point. Institutions have not bought in to this rally, they are just there to recoup losses, take a look at the performance figures for all of mutual funds, they badly lag the indices. The reason is just that liquidity has been burned out of the market. People took their money out of mutual funds, and they have never returned. So the institutions cant go out and buy stocks if they don't have positive fund flows. They have a wait and see attitude. They are enjoying the ride up with what ever assets they have, but when the market turns they will be forced to liquidate along with these HFT programs. I don't want to be long this market when that inevitably happens.

The market doesn't need more complexity, and it definitely doesn't need the leverage at this moment when the crisis is still fresh in every ones mind.

The Nay Sayers will say these programs are build by smart people, are fool proof, they have taken the proper precautions, trust us.

Whats the definition of Insanity?

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