Robert K. Merton listed six possible causes of unanticipated consequences:
1) Ignorance,
2) Error in analysis,
3) Immediate interests,
4) Basic values,
5) Self-defeating prophecy,
6) Relevance
HFT should absolutely be banned. It is not a trading strategy; it is an exploitation of the market - an unfair advantage that a few large traders have. It is effectively cheating, largely at the expense of individual investors.
Good article. I actually don't have a problem with Algo's as a whole - it's just the HFT b.s. that many traders are using to front run the market. Their counterargument that they provide much needed liquidity is pure malarkey - the system functioned fine and had plenty of liquidity before they came along. I do agree that we have yet to see the full wrath of an Algo error -- May's bizarre drop is only a taste of what might come. These things can blow themselves up just like any other trader, unless they're cheating the system (i.e. front running).
From Max S.: You might like: http://www.theatlantic.com/magazine/archive/2010/07/monsters-in-the-market/8122/
ReplyDeleteGood article. I actually don't have a problem with Algo's as a whole - it's just the HFT b.s. that many traders are using to front run the market. Their counterargument that they provide much needed liquidity is pure malarkey - the system functioned fine and had plenty of liquidity before they came along. I do agree that we have yet to see the full wrath of an Algo error -- May's bizarre drop is only a taste of what might come. These things can blow themselves up just like any other trader, unless they're cheating the system (i.e. front running).
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