- Posted by Jeff Carter on April 22nd, 2014 at 8:47 am
It seems all the attorney generals of the country read Michael Lewis book and subpoenaed high frequency traders. Populism is not a way to regulate a market. Nobel prize winning economist Joe Stiglitz put out a hasty paper encouraging a transaction tax as a solution to the problem.
What I find when I look at the analytical differences between fresh and salt water economists is salt water economists (Stiglitz, Kruger, Schiller, Tobin, DeLong) think they can control things with regulation. They view the world as a puppet and they are the puppet masters. Pull this string, this happens.
When I read fresh water economists (Fama, Cochrane, Becker, Murphy, Rajan, Hansen, Lucas, Coase, Friedman), they layout the economic incentives and then the market decides the outcome. Whatever the market says is the correct solution-even if we don’t like it.
Everyone analyzing HFT is chasing shiny objects, and no one is confronting the real problem, except startup exchange IEX. I really like what they are doing. It is too bad that US regulation is so archaic, expensive and intrusive that it’s simply too expensive and difficult to set up competing exchanges.
Here are things in the debate over high frequency trading that are NOT problems:
- Speed. It doesn’t matter how fast the market is as long as everyone goes at the same speed. There is an argument to be made for speed creating more efficiency if administered properly, not less.
- If an agent is a liquidity provider or taker. This is very difficult to prove and every single person in the market thinks they provide liquidity.
- How long someone holds a trade-who cares? As long as they are assuming real risk when they trade and the market is competitive.
- Speculation-it doesn’t matter why people trade in a marketplace. All that matters is everyone is treated the same. There is a very good argument to be made that speculation improves transparency and price discovery.
- Price discovery. The only thing that matters is everyone finding out information at the same time. HFT doesn’t hurt or help price discovery. If markets over react one way on information, efficient market theory would tell you that there is an opportunity to use that to make risk free arbitrage profit.
Stiglitz correctly points out markets are more volatile today than they used to be. But it’s not total volatility but marginal volatility. The reason isn’t HFT, but the way the market incentives and structure are formed. There is simply less on the bid/ask than there used to be and more slippage.
Everyone’s solution to the problems on the salt water side ends up as a tax. That is the wrong solution. It is also vitally important to know what marketplace is being analyzed. Futures are not at all like equities. They have different reasons for existence, and different regulatory structures. For example, there is only one data feed in futures.
The problem we have is the market structure and regulatory framework. Let us fix that first. Create a system where the end user is closer to the market, eliminating middlemen. Make the market more competitive, without ways to circumvent it or seek rents through dark pools, pay for order flow, maker/taker, price rebates etc. Exchanges have created a tiered system within their own ecosystems to create new streams of profit.
Once we fix regulation, we can see if HFT has the same effect. Let the market decide. My bet is HFT won’t matter at all then.
Should AirBnB Be Valued at More Than Hyatt?
Posted by Jeff Carter on April 21st, 2014 at 9:11 am
Airbnb just raised $500M at a $10 billion dollar valuation. That’s impressive. It looks like they are on the way to Wall Street. Here is [...]
Confront Your Fear
Posted by Jeff Carter on April 20th, 2014 at 10:31 am
Happy Easter. The current tradition in my family is to head to a sunrise service at the beach. We go to Lake Michigan, then walk [...]
Re-Engineering Old Things To Make Life Better
Posted by Jeff Carter on April 19th, 2014 at 10:05 am
If you have ever chopped wood with a traditional axe, this will impress you. I have. Chopping wood is hard work. The axe gets stuck [...]
Traits For Success
Posted by Jeff Carter on April 18th, 2014 at 7:44 am
If you had to pick 4-6 traits that help make people successful what would they be? From time to time I see things in entrepreneurial [...]
It Wasn’t A Financial Crisis; It Was A Systemic Run
Posted by Jeff Carter on April 17th, 2014 at 8:27 am
Blockbuster paper released by Professor John Cochrane yesterday. It’s on the financial crisis. In January of 2009, I saw a panel discussion at the University [...]
Midwest, Evolving Hub for Entrepreneurship
Posted by Jeff Carter on April 16th, 2014 at 8:27 am
The giant is starting to wake up from its slumber. From 1850-1900, the Midwest was extremely entrepreneurial. Necessity is the mother of invention, and there [...]
How Do You Get to The Next Round?
Posted by Jeff Carter on April 15th, 2014 at 9:41 am
Last night I was listening to some student/companies pitch at the Ed Kaplan New Venture Challenge. At the end of the evening, they flipped it [...]
What Is The Midwest Good At? Manufacturing
Posted by Jeff Carter on April 14th, 2014 at 8:24 am
The study that a group of University of Illinois graduate students undertook affirmed a lot of my hypothesis about the startup ecosystem in the Midwest. [...]
What Is The Midwest Good At? Big Agriculture
Posted by Jeff Carter on April 13th, 2014 at 9:18 am
Clusters don’t grow in a vacuum. Usually there is a reason cities exist where they do. If the city is old enough, usually there is [...]
Can the Midwest Build A Self Sustaining Tech Cluster?
Posted by Jeff Carter on April 12th, 2014 at 9:36 am
Yesterday I was at 1871 and listened to a presentation by some University of Illinois students. They have been doing some research on the Midwestern [...]
Learning Through Second City in The Second City
Posted by Jeff Carter on April 11th, 2014 at 9:04 am
Last night I was part of an Improv class. At Hyde Park Angels we thought bringing in some people to do an Improv thing with [...]
Should You Enroll Your Children in Entrepreneurship Programs?
Posted by Jeff Carter on April 10th, 2014 at 8:03 am
Yesterday I read the hot new trend is to enroll your young child in an entrepreneurship program. The subject of being an entrepreneur is hot. [...]
Electronic Systems Do Fail
Posted by Jeff Carter on April 9th, 2014 at 8:10 am
Yesterday $CME’s electronic trading system shut down because of some glitch. This happens from time to time in electronic systems. No matter what programmers do, [...]
Want To Get Cash In The Door? Sell.
Posted by Jeff Carter on April 8th, 2014 at 9:19 am
Mark Suster has a great blog post up about sales. Sales is an often overlooked piece of building a company. Suster writes a lot about it [...]
Food For Thought When We Think About Ethics and the Use of Social Media to Achieve Goals
Posted by Jeff Carter on April 6th, 2014 at 5:17 pm
Sometimes it’s best to go back to classics when we want to think about how to apply ethics to modern day problems. John Stuart Mill [...]
This Is Cool, and What the Internet is All About
Posted by Jeff Carter on April 6th, 2014 at 10:37 am
The internet empowers individuals to do things that are important to them, that might also be important to others. Very cool idea and I hope [...]
The Founder Was Ousted at Mozilla
Posted by Jeff Carter on April 6th, 2014 at 8:49 am
It was a sad day for me when Brenden Eich was ousted at Mozilla. He wasn’t ousted by a venture capitalist. He was ousted by [...]
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
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