I Hate HFT (originally posted 8/23/13)

Not so much options talk today. Instead I will rant (again) about how hyper fast computer trading is harming the markets and how the exchanges are doing little or nothing to ameliorate the situation. And I'll conclude with a reminder that trading floors full of human beings were in many ways more fair and efficient than screen based trading.

The all computer exchange NASDAQ was shut down for more than three hours yesterday. To quote the NY Times, "the breakdown appears to be one of the most significant technology problems to hit a trading world that has become accustomed to glitches". Recall what a debacle the Facebook IPO was just a year ago. Let alone the “flash crash” when a flurry of stocks plunged to $1 or less and the Dow Jones industrial average plummeted more than 700 points in a matter of minutes only to roar back up in a few more minutes.

Again from the NY Times, “You have a very Rube Goldberg system,” said Gene Noser, co-founder of the brokerage firm Abel/Noser. “We've just put patches on it without attacking the basic problems.”

The basic problem, in my view, is that trading is being taken over by High Frequency Trading (HFT) which does nothing to aid the basic function of a stock exchange and simply overwhelms the system as thousands of orders are input and cancelled in fractions of a second.

One reason the exchanges are so passive about regulating this is money. Some people estimate that up to 70% of current volume is generated by HFT. Simply put, the exchange wants the revenue even at the expense of a fair and orderly market.

When trading was done by people, face to face, this sort of insane market movements couldn't happen. People intervened.

When the stock market crashed on Oct. 19, 1987, the NASDAQ appeared to have done much better than the NYSE While the Dow Jones industrial average fell 23 percent that day, the NASDAQ composite index was off just 11 percent.

It was not, it turned out, that NASDAQ stocks were more highly regarded. It was, instead, a question of the technology used. At the NYSE, trading was still largely done by people, in open outcry. On the NASDAQ, trades were done by phone. The difference was that the market makers at the Big Board could not escape dealing with the flood of sell orders. But many NASDAQ market makers could, and did, decide not to answer their phones. Analogous today to simply turning off their computers

The NASDAQ appeared to be operating, even though it really wasn't. Not that any of this matters in this here and now. Open outcry is as dead as the horse and buggy and exchanges love HFT even as it harms the marketplace.

Leaving me with only a rant.