I write in reply to your observations on high frequency trading. It is my opinion that there is, conceptually, very little difference between an 'old fashioned? stock specialist or market maker and algorithms driving a high frequency trading platform. Two important points to note: a. people have been trading trends and using technical indicators for tens of years, and b. the market is not a alien construct that magically provides liquidity as and when ?value? investors decide to trade.The value of a healthy functioning secondary market relies upon the presence of a community of market participants with very different varying risk utility and trading preferences. It is also very important to have market participants with varying time horizons. If ?value? investors dominate the market, it would be very difficult to match buyers and sellers as their trading frequencies are much lower. If market markers find it increasingly hard to find an opposing trade over a period of time, spreads will widen substantially and the capacity to trade as principal reduces dramatically. Given the choice, most market participant would rather have the ability to disperse risk with some cost rather than face the possibility of not being able to trade at all. This affects all other markets dependent on the cash market ? options markets, OTC and structured products deals. For those who insist that they do not care about the ?casino?, this also affects their pensions and a lot of annuities products.I suspect it is common knowledge, but it is worth stating that ?normal humans? do have sensitivity to the trends of the market whatever they believe what the ?value? of a stock is. These are quotes from a 1988 SEC report on the October 1987 crash:?Specialists told us that, although their function is to maintain a fair and orderly market, their responsibility is to alleviate temporary market imbalances ? not to prevent significant changes in market perceptions from being reflected in stock prices?.. All six of the specialists we spoke to said they do not see themselves as buyers of last resort in markets such as that of October 19. This view was generally supported by broker/dealers we spoke with???..They added that, given the market trend on late Monday, October 19 and mid-morning October 20, it would have been suicidal to continue to buy when the entire market wanted to sell. For example, one specialist indicated that on Tuesday, just prior to calling a halt in trading, he was facing, just in the crowd of floor brokers, orders to sell at least 500,000 shares of one stock, without any buy orders. Also, one SEC official said it is not reasonable to expect specialists to engage in ?kamikaze? trading strategies.?So, horrors of horrors, there is evidence that humans are sensitive to market movements and are as liable to be obsessed about market trends? Remember, we typically do not need machines to do unto ourselves what we would do unto others.It is worth finding out more about high frequency trading. The normal trade size for high frequency trading is typically much smaller and they hold much less aggregate risk than a traditional fund manager running a longer term strategy. Markets react dramatically to panic outsized trades on unexpected news or redemption/collapse of a fund. The comparison to credit products is a bit silly. Just because something is popular does not doom it to disaster. This subject deserves more considered thought.We should as easily complain that hedge funds, mutual funds and pension funds are too large and whenever they want to trade in a particular stock, they tend to cause dramatic market impact. So, the question is why the audience would necessarily penalize the tyranny of smarts and use of technology rather than penalizing the tyranny of wealth and abundance of resources.The statement that somehow ?fundamental analysis? is a much more demanding occupation is just not worth a reply. I would like to make two final points: a. If the author feels that the algorithms and the business of HF trading is trivial and less hard work than fundamental analysis, he should get some money and build a real machine and prove his point, and hopefully in the process uncover real life experience of HF trading; b. I urge the author to prudently exercise his right and ability to correct the HF traders who ignore the value of a stock and buy the stock himself if it was pushed down excessively by stupid feedback.

Seems like a jumbled reply to Paul's post here:http://www.wilmott.com/blogs/paul/index ... e-get-here

Dear OCD i hope this is better for you.I write in reply to your observations on high frequency trading. It is my opinion that there is, conceptually, very little difference between an 'old fashioned? stock specialist or market maker and algorithms driving a high frequency trading platform. Two important points to note: a. people have been trading trends and using technical indicators for tens of years, and b. the market is not a alien construct that magically provides liquidity as and when ?value? investors decide to trade.The value of a healthy functioning secondary market relies upon the presence of a community of market participants with very different varying risk utility and trading preferences. It is also very important to have market participants with varying time horizons. If ?value? investors dominate the market, it would be very difficult to match buyers and sellers as their trading frequencies are much lower. If market markers find it increasingly hard to find an opposing trade over a period of time, spreads will widen substantially and the capacity to trade as principal reduces dramatically. Given the choice, most market participant would rather have the ability to disperse risk with some cost rather than face the possibility of not being able to trade at all. This affects all other markets dependent on the cash market ? options markets, OTC and structured products deals. For those who insist that they do not care about the ?casino?, this also affects their pensions and a lot of annuities products.I suspect it is common knowledge, but it is worth stating that ?normal humans? do have sensitivity to the trends of the market whatever they believe what the ?value? of a stock is. These are quotes from a 1988 SEC report on the October 1987 crash:?Specialists told us that, although their function is to maintain a fair and orderly market, their responsibility is to alleviate temporary market imbalances ? not to prevent significant changes in market perceptions from being reflected in stock prices?.. All six of the specialists we spoke to said they do not see themselves as buyers of last resort in markets such as that of October 19. This view was generally supported by broker/dealers we spoke with???..They added that, given the market trend on late Monday, October 19 and mid-morning October 20, it would have been suicidal to continue to buy when the entire market wanted to sell. For example, one specialist indicated that on Tuesday, just prior to calling a halt in trading, he was facing, just in the crowd of floor brokers, orders to sell at least 500,000 shares of one stock, without any buy orders. Also, one SEC official said it is not reasonable to expect specialists to engage in ?kamikaze? trading strategies.?So, horrors of horrors, there is evidence that humans are sensitive to market movements and are as liable to be obsessed about market trends? Remember, we typically do not need machines to do unto ourselves what we would do unto others.It is worth finding out more about high frequency trading. The normal trade size for high frequency trading is typically much smaller and they hold much less aggregate risk than a traditional fund manager running a longer term strategy. Markets react dramatically to panic outsized trades on unexpected news or redemption/collapse of a fund. The comparison to credit products is a bit silly. Just because something is popular does not doom it to disaster. This subject deserves more considered thought.We should as easily complain that hedge funds, mutual funds and pension funds are too large and whenever they want to trade in a particular stock, they tend to cause dramatic market impact. So, the question is why the audience would necessarily penalize the tyranny of smarts and use of technology rather than penalizing the tyranny of wealth and abundance of resources.The statement that somehow ?fundamental analysis? is a much more demanding occupation is just not worth a reply. I would like to make two final points: a. If the author feels that the algorithms and the business of HF trading is trivial and less hard work than fundamental analysis, he should get some money and build a real machine and prove his point, and hopefully in the process uncover real life experience of HF trading; b. I urge the author to prudently exercise his right and ability to correct the HF traders who ignore the value of a stock and buy the stock himself if it was pushed down excessively by stupid feedback.

I'm a bit afraid about High Frequency trading. Even if people believe that it increases liquidityJournal of Finance/ Does Algorithmic Trading Improve Liquidity?QuoteAlgorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exoge- nous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces ad- verse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes. It increases volatility as well. And when volatility goes up, the part of unpredictable randomness raises. QuoteMarkets exist to enable businesses to raise money, to expand, to thereby employ people, and so on, for the benefit of society.TOTALLY AGREE WITH THAT. Is it still the case today ? I don't think so ... QuoteOtherwise the market is no different from a casino, a share price may as well be given by the spin of a roulette wheel.Survey in a class of mathematical finance. What is the closest comparison of the markets ? Answer of the students: Casino. So the next professional of the finance I know consider the market as a casino game and quant analysis as finding the "optimal" strategy to win ? Where is the fundamental value of a company ? Nowhere ...QuoteMuch easier is to run a data feed into a black box containing some algorithm, then optimize that algorithm.I think that HFT is also a very hard work. First because it is VERY competitive and second because it is VERY technical. After that a bug in a code and everything can happen... For me it is not cheese or dessert it is the both I think that high frequency trading needs fundamental analysis to build both short time strategies with HFT algorithm and long term ones with fundamental analysis.

Is there a way to reply/comment on Paul's blog?

no otherwise it would have been directly posted to him.

You can PM him if you want but it's at your own risk Even if I believe that he would answer.