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Friday, September 12, 2014

Strategic CSR - HFTs

The article in the url below from The Atlantic is a great riff on cheating that, in the process, puts high-frequency traders (HFTs) in their place (sorry, I meant in the correct context):
"It's Wall Street at its most socially useless. HFT funds aren't allocating capital to where they think it'll be most productive. HFT funds are allocating capital to where they think other people will put it 50 milliseconds from now. It's a tax on everybody else. And it's a tax that has basically no benefit. Sure, HFT funds defend themselves by saying they're increasing liquidity, but increasing liquidity is the last refuge of bullshitters. … Economist Paul Samuelson had it right all the way back in 1957: knowing (or trading) something one second before everyone else is personally profitable and socially pointless."

As everyone now knows, thanks to Michael Lewis' book, Flash Boys, the way HFTs make money is by front-running the market:
"The Wall Street Journal reports that HFT funds buy early access to data from third-party distributors—everything from corporate earnings to the Philadelphia Fed's manufacturing survey. They're getting the numbers just fractions of a second early, but that's more than enough in the world of high-frequency trading. … The private sector isn't paying for the creation of a public good when it buys a sneak peek at them. The private sector is just profiting off existing public goods. If a company sold hedge funds an early look at their earnings, it'd be insider trading. But when a third-party like Business Wire sells hedge funds an early, albeit split-second, look at corporate earnings, it's perfectly legal. It's nuts."
Of course, the important questions is: Who are the bigger idiots—the HFTs for doing what they are doing, or us for letting them get away with it?
Have a good weekend.
David Chandler & Bill Werther
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High-Speed Trading Isn't About Efficiency—It's About Cheating
By Matthew O'Brien
February 8, 2014
The Atlantic