Mon, Mar 31, 2014 - Page 15 News List

‘High-frequency trading’ spreads

The Guardian, LONDON

So then, to our ever-widening financial lexicon, a language forced upon us by catastrophe rather than from a desire to broaden our knowledge, we will soon be adding the initials HFT.

Moving beyond such legacy phrases as collateralized debt obligations, default option swaps and off-balance sheet reporting, all so quaint, so pre-Lehman Brothers, HFT — or high-frequency trading — is coming to a dinner party near you.

It is the big new buzz in the City and, as you struggle to get your head around what it means to you and your mortgage or pension, you can be assured of three things.

First, that it is complicated. Second, a small number of people are making a lot of money from it. And third, it will all end in tears.

Of course, like all new things, it is not new at all. Yet the imminent publication of financial seer Michael Lewis’ new book on the subject, Flash Boys: A Wall Street Revolt, is going to drag it out of the shadows and thrust it before a bewildered public.

It is likely that entire lawsuits will be devoted to HFT in the future but, in a nutshell, it genuflects before that most fundamental of banking maxims: Time is money.

Over the past two decades, HFT firms have gone to extraordinary lengths to transmit information at close to the speed of light.

They have employed fiberoptics, microwaves and even drones to shave microseconds off the time it takes to execute a financial trade. The more time they shave, the more they can beat the other guys.

As CNBC.com said about one new HFT platform: “It can save just over four milliseconds of one-way transmission time between the two markets ... a tiny sliver of time that can yield outsized results for high-frequency traders operating superfast algorithmic trading systems.”

That sounds really cool, but Lewis, bestselling author of Liar’s Poker and The Big Short, is worried about this development, fearing that the stock market is now “a war of robots.” This, as the manifold, highly remunerated PR firms working for the City banks operating HFT platforms will surely be explaining very soon, is just simple scaremongering.

Indeed, we can be reassured that none other than the banks themselves are on top of the situation. Rest assured, it is not going to end in some Terminator-style scenario where the robots rise up and bring Western capitalism to its knees. After all, none other than what Rolling Stone memorably called the “vampire squid,” Goldman Sachs, has become a zealous promoter of reforming the HFT system.

Cynics may conclude that Goldman’s damascene conversion is a PR exercise designed to counter some of the more incendiary material that Lewis is expected to disclose.

Yet they would be wrong. After playing a heroic role in the sub-prime mortgage scandal and Greece’s economic ruin, Goldman, like all the big banks, is surely now turning over a new leaf.

This is just as well. The consequences of a repeat of the 2008 financial crash, conducted at warp speed, are too terrifying for us mortals to get our heads around.

History repeats itself first as tragedy, second as farce, Marx observed. He did not have fiberoptic broadband.

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