ABCs of HFTs

Of late we have heard much verbosity

Expressing the Street's animosity

Toward traders who trade

With programs they made

To profit by rapid velocity. 

Indignant stock-pickers confront one

With evidence (and it's a blunt one)

That HFTs aim

To rig the whole game

By trading so fast they can front-run. 

HFTs claim, in defense,

Their volume may lower expense 

And help to enrich

The others from which

They're skimming off fractions of cents. 

My view may be non-analytical

But in this matter tends toward the critical,

For it's hard to ascribe

A positive vibe

To a practice at heart parasitical. 

*************************************************

High-frequency trading represents a sort of "rise of the machines" over Wall Street, in which powerful computer algorithms are dedicated to exploiting market information almost literally at the speed of light. The practice has long been controversial among market professionals, where opinions differ as to whether such machines personify R2D2 or the Terminator. 

Michael Lewis, author of Moneyball and Liar's Poker, has written a new book called Flash Boys, which comes down on the side of "hasta la vista, baby."  In an interview on 60 Minutes, Mr. Lewis brought this Wall Street issue on a perp-walk down Main Street. 

"The stock market is rigged," declares Mr. Lewis, by a combination of HFTs, big banks and the exchanges themselves. The HFTs are allowed to see everyone else's trades a split second before the general market does, giving their lightning-fast algorithms time to get out in front of market-moving order flows. This amounts to small-scale theft, repeated so often and so quickly that it becomes large-scale. 

However, some knowledgeable insiders disagree, and say that HFTs have been good for the small investor. Their big volume of small trades has lowered the bid-ask spread, reducing everyone's cost of execution. Much of the complaining, says Cliff Asness of AQR Capital Management, comes from money managers who can no longer place large orders without moving the market. "Well, sorry," counters Mr. Asness, "but prices responding quickly—and traders not being able to buy or sell a ton without the market moving—is what is supposed to happen in a well-functioning market."

A compelling counterpoint to be sure, but the fact remains that some firms trade with high frequency while losing with rarity, or not at all.  "How is it possible that one of the largest high-frequency trading firms executes millions and millions of orders for four years without ever having a down day?" asks Barry Ritholtz.  "The short answer is what they do is not trading -- it is skimming. I call it legalized theft. High-frequency trading is a tax on investors, encouraged by the exchanges, allowed by the SEC."

Are we ready to prosecute the Terminator for algorithmic inside trading?

Wage Index Report

The data on wages disclose
That the specter of joblessness grows,
Except for the few
Making mega-bucks, who,
In their number, substantially rose.

The Social Security Administration released its Wage Statistics for 2010, and - with one glaring exception - they tell a sorry tale.   Journalist and author David Cay Johnston crunched the numbers and found that

There were fewer jobs and they paid less last year except at the very top, where the number of people making more than $1 million increased by 20 percent over 2009. The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999. The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

Hat tip to Barry Ritholtz, who notes the obvious statistical underpinning for the Occupy Wall Street movement.

We Never Learn

Said an analyst: "Risk, from where I sit,
Is consistent, however you slice it,
And our colleagues in banking,
For profit or ranking,
Consistently still underprice it."

Investment manager and commentator Barry Ritholtz, frustrated by the events unfolding between Greece and its creditors, poses the thoughtful question: "Who the f--- would lend a dime to these people?" In a rant posted on his blog, Mr. Ritholtz asserts that lenders are to blame when borrowers default for reasons that were well-known when the deal was done. We agree, but bankers themselves know that competition and the search for yield will, time and again, lead them to underprice risk, or wish it away.