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Is High Frequency Trading Changing Anything?



April 19, 2012 – Comments (0)

Board: Macro Economics

Author: wittgenstein

This link has been posted elsewhere on TMF.

....implying high frequency trading is somehow at fault for the difficulties ordinary investors have in these times.

I have to wonder if this is yet another case of laying blame at the feet of people who are in reality simply responding to the new reality of the ailments of the modern capital markets. Heaven forbid one should call attention to a malaise that has a "political" aspect at its center.

I had always been of the opinion that a capitalist society created actionable possibilities of financial risk and reward in relation to the investor's...or speculator's capability to discern likely outcomes and risk tolerance necessary in an attempt to derive benefit therefrom. The epitome of the low frequency trader may well be Berkshire Hathaway. I'm aware of the endless discussion regarding the "true value" of the holdings of this august entity, which indeed...if one takes a sufficiently "low frequency" approach to valuing the returns..seems impressive... as well it should, since it has made nary a payment to its shareholders in the form of a dividend in recent memory.

But as I sit on my kids' porch in Maine awaiting the "eventual" arrival of summer (an annual event lasting about four days) I can become philosophical about the question of trading vs. "investing".

Computer algorithms may well be creating unwelcome and misunderstood volatility. There appears to be scant concern about this amongst Berkshire Hathaway investors. But then again at the present time, the original investors aside, this seems to be a function of many shares in the hands of those who are awaiting an event that is best known to themselves.

When I started investing in 1956, the most efficacious reading material in American markets consisted of the morning paper...which was usually not the WSJ...or certainly the FT, and a S&P stock guide. The Neue Zurcher Zeitung contained almost no reference to shares of companies in its 1/2 page financial section. A good way for an 18 year old to make money in the US market was to buy one of the great long term investments of the day like Eastman Kodak or Haloid Zerox, or, for a brief period an out and out spec like Trans Canada Pipeline. There were no hedge funds, a high frequency trader had to be a complete fool and someone in Boston had just started something called a "mutual fund" that sounded like a university, "MIT", Mass. Investors Trust.

Now everything that anyone needs to know purports to be told on CNBC..or Bloomberg.. by an engaging group of English majors helped along by some glib talker whom it is to be assumed is in the pockets of his old hedge fund buddies. There is always the odd assortment of fund managers, most of whom by my recollection can safely be ignored, but the mere fact that this is deemed worthy by General Electric of being broadcast 15 hours a day seems to me evidence of a decline in the values of at least their audience.

I guess I'm wondering whether if I decided to write a big check to a software provider and a few more to some maths PHDs to become a high frequency trader, would this signal the end of HF trading, and it would be back to the S&P stock guide and a stock broker who would bleed me with commissions in return for an annual boring lunch at the Cumberland Club.

I'm too old to change my stripes. I will continue to buy income "spread product" in a way that has made me very decent money over 50 years and equities of companies that I am capable to evaluate by reading and applying a banker's eye to fine print and not "sell side wisdom"...and which, unlike WEB make frequent and steadily increasing cash payments to "those who stand and wait"

So what's changed?


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