December 5th, 2010, 2:19 am
Monty Wilmont has this to say in his blog:QuoteAnother day, another email in my inbox announcing another High Frequency Trading conference. But a large number of emails on the same subject in a short space of time is a sure sign of a bandwagon. And bandwagons are often bad news for the markets. So according to my inbox there is far too much algo/hf/computerized trading. The minimal benefits this confers in terms of supposed "efficiencies" is far outweighed by the potential it has for causing chaos.To me, the progressive automation of trading is like the decoding of the human genome. The genome was always there. Now it is described and recognized by a computer. People assumed this would bring a lot of new drug development, maybe it has.Certainly the creation of knowledge in the form of summaries of participant behavior, compressed into algorithms, introduces new behavior. And new things sometimes lead to surprises. But I see the impact as being more like the impact of telephones or email on communication. There is a lot more communication at the lower price, but still the same amount invested. People still talk about the same things.Monty compared this to the explosion in credit derivatives. But credit derivatives moved the needle on long-term investment. By definition, high frequency trading does not increase stock ownership, for example. Moving the needle on long-term currency positioning, for example, is still the territory of big discretionary speculators. And people have not been pushing money into stocks because of some illusion of liquidity.What if I made an iphone app to track the last time I walked my dogs, and what they did? I would begin timing my dog walking by an algorithm. I would be doing what I always did in a statistically-optimized, quantitative way. But this would not create some illusion that leads me to keep an additional dog, unless I already owned 10 or 11.When non-business email came on the scene with hotmail, people did invest a bunch of money building webmail services. But they did not use the email to make irrational decisions. If anything, people started doing less, and just sent emails all day.