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farmer
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Joined: December 16th, 2002, 7:09 am

disagree with Wilmott about hf automation

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.
 
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farmer
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Joined: December 16th, 2002, 7:09 am

disagree with Wilmott about hf automation

December 5th, 2010, 2:30 am

I am drunk, so I wanted to show some bravado and say I am willing to write a put on hf trading. But I don't even know what form that would take. Do you? If someone told me there were too many credit derivatives, it would be easy to come up with a put to write if you thought there is no danger from it.I know, you could write the universal put, the S&P 500. The S&P future originally did create an illusion of liquidity. But hf trading of the future has steadily risen, and the selloffs are less vicious at the same time. Anyone have a chart of the biggest S&P percentage down day by year? The epoch looks statistically relevant to me.Sure, hf trading has gone parabolic like email. Don't look for a crash, look for pornography somehow. Mobile hf pornography trading on smartphones.
 
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Gmike2000
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Joined: September 25th, 2003, 9:49 pm

disagree with Wilmott about hf automation

December 5th, 2010, 11:01 pm

I have said it before and so let me say it again: High frequency traders are like flies that suck on shit. They don't make bear markets, they don't make bull markets either. Markets (not just in stocks, in financial derivatives as well) have been around for over 500 years, without HF traders.We can call them the oil that helps grease the machine. Fine. But at the end of the day, there is a "natural" trading activity that happens in the market as money moves from one sector to another and back during an economic cycle. HF trading may facilitate it or not...but what is important to note is that HF or no HF trading, the fundamental game is not changing. There will be panics, there will be euphoria. There will be bull markets and bear markets. There will be more "flash crashes" which 100 years ago were called "panic days" on Wall Street. This is how it has always been. This is how it always will be.HF trading isnt going to change anything at all. It will just become another "olympic discipline" in the market's game.
 
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Gmike2000
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Joined: September 25th, 2003, 9:49 pm

disagree with Wilmott about hf automation

December 5th, 2010, 11:01 pm

Last edited by Gmike2000 on December 5th, 2010, 11:00 pm, edited 1 time in total.