JFK and Flash Trading: Paranoid Conspiracy Theories

High frequency trading: I don't like it either, but let's not blame it for all our problems.

I've heard this a lot recently: we're down because high frequency traders keep gaming the system.

Here's my question: the markets went up in a straight line from August last year to February. Did high frequency trading cause the markets to go up, too? How come I didn't hear people coming on our air saying, "Thank you, high frequency traders, for our rally!"?

Fact is, in any five-minute period, most high frequency traders are as much buyers as they are sellers.

As for me, I don't like high frequency trading. I don't like it because they can make decisions far faster than humans, and it diminishes the role and the value of good old fashioned human decision making. It's another nail in the coffin of human intervention. It's a trend everywhere — if you think humans land airplanes, well, they don't.

And — I can't prove this, but I believe it — I think that at the margins, high frequency trading exacerbates the price swings on high volume days.

But that doesn't mean I think high frequency trading is the source of all our problems.

Here's what I think: I think Oswald killed Kennedy. I think humans do a lot of feeling and they mistake it for thinking.

The word "machine" has become a metaphor for our vague collective fears, our sense of powerlessness. We are eager to blame them for our problems.

This attitude represents what the historian Richard Hofstadter called "the paranoid strain in American politics," the feeling that somewhere there are nameless, faceless men that are pulling the levers, controlling our lives.

The fact that high frequency trading has only been around for a few years is besides the point. Before high frequency trading there was another bogeyman: NYSE specialists and Nasdaq market makers.

For years, I took phone calls from buyside traders bitterly complaining about the outsized influence specialists and market makers were having on stocks. "Pisani, let me tell you what happened to me with that specialist in 'X' stock," some trader would say. I heard it for a decade.

If only we got rid of that crummy system, if only there were other places to trade, trading would be so much better...

Well, they got their wish. The SEC destroyed the specialist system, destroyed the near-monopoly the NYSE and the Nasdaq had on trading, allowed trading in pennies and encouraged the creation of the software and hardware that allowed high frequency trading...and algorithmic trading.

Now, traders are dying to go back to the good old days that so many of them vilified.

Here's a bigger problem: who exactly is there to trade with? Retail traders have been trading less and less all year; only last month as the market showed signs of cracking did they increase trading, and then to sell. Proprietary trading desks have been downsized or eliminated.

And many other buyside traders have become less proactive. Why? Because it's gotten harder to control their orders. When a trader sends an order using an algorithm, he or she doesn't really call the shots. The trader may not know what platform the order will end up on, who is on the other side of the trade, or even the price necessarily.

Again, that's all because the SEC decided the old system didn't work.

Finally, while we're looking for bogeymen: how come no one is coming out screaming about these Lehman-like speculative attacks on European banks and blaming...macro and distressed hedge funds? We know from Lehman that speculation, rumors and innuendo can become reality; someone is obviously betting that will happen. Where are the attacks on the evil hedge funds?

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