Keep calm and carry on

Christian VoigtThe debate around HFT and the impact on financial markets is getting more and more heated. The latest contribution is by Charlie Munger claiming that HFTs “have all the social utility of a bunch or rats admitted to the granary” and that “computer algorithms work a lot like legalised front-running of orders”.

Maybe it is about time to ask everyone to keep calm and carry on.  Firstly, skin-deep generalisation across all HFT facilitators is hardly helpful.  Secondly, HFT is a technology and not a trading strategy. It’s not the machine that manipulates prices, it’s the human behind it, and humans have attempted to chisel money out of the market for long time.

Just remember the Nasdaq market maker incident discovered by William G. Christi and Paul H. Schultz. Both scholars published a paper in 1994 showing that market makers at Nasdaq colluded to avoid odd-eight quotes and to keep spreads artificially high. Back then, human market makers teamed up to cheat the market and it was two researchers with a powerful computer that found the empirical evidence of their deeds.

It’s worth remembering that technology doesn’t have the capacity to cheat, but humans do.

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