15 September 2012

HFT

Marginal Revolution | Tyler Cowen | What are the social costs of high-frequency trading?

I’ve yet to see a good argument that they are high.
Indeed. I also don't see what the social costs are supposed to be. Often people say they are concerned about the social costs but give examples of private costs.

So Firm X invests their capital in shaving a few microseconds off executing an order. That produces {a sizeable benefit to them; a very, very, very, very small benefit to me} at the cost of {a large cost to them; no cost at all to me}. It's not like I'm being taxed to pay for new HFT R&D.

"Oh no! Firm Y lost a bajillion dollars because their algorithmic HFT systems screwed up! We must limit HFT!" Okay, sure. But didn't Firm X's counterparties make a nice chunk off those deals? Where's the loss? Why must we protect X from their own errors?

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