You Can Keep Your “Liquidity”
- Joshua M Brown
- May 10th, 2010
Organized scalping under the guise of "adding liquidity"? No thank you. High Frequency Tradebots can take their brand of so-called liquidity and shove it.
This will not be an "oh, the evil machines are ruining our lives" post. Rather, it is the people behind the machines that I think we should be concerned with.
I used to buy into that whole "we're adding liquidity to the market" argument to an extent, but that was before I saw what happens when the machines swing a wrecking ball through the exchanges - and then shut themselves off. The proverbial 'air pocket' created during the Dow's thousand point cascade down last Thursday was a direct result of computers that unplugged autonomously at the worst possible time - yanking away their vaunted liquidity just when it was needed most.
With friends like the liquidity-providing HFT algorithms, who needs enemies?
As has been well-documented in the Wall Street Journal and elsewhere, the robots and trading programs triggered an enormous decline that day and then added insult to injury by scampering off so fast you could speak to their breeze. As a result, the scalping and front-running that we were all putting up with in the name of voluminous markets will no longer be tolerated.
Someone else in the blogosphere asked if last week's mini-crash was to become the "Three Mile Island for High Frequency Trading" - turning us against it like the referenced disaster curtailed all nuclear power projects. I don't know, maybe.
Or maybe, like the oblivious abettors of systemic risk we've become, we can just wait until someone tries for a two thousand point sell-off! Circuit-breakers would be triggered, you say? If they work anything like the rest of the apparatus these days, I'll recommend you stock up on canned goods and potable drinking water.
The fact that something like 70% of trading volumes are now from high frequency activity means that we are way behind the curve in terms of policing this stuff.
To the machine programmers and sponsors that create havoc and jump in front of our orders, do me a favor: Keep your liquidity. We'll just stick with the way trading's been done in the prior 250 years, but thanks for playing.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.