DIGITAL AMERICA

Spring loading is Leading the Existence of Dark Pool Markets

// Posted by on 04/06/2014 (6:15 PM)

When looking at the world around us today we use patterns and formulas for most of our activities. From knowing the exact process at a fast food restaurant to checking the weather these formulas have been created and implemented to make our lives efficient and more useful. The question that is posed in Rushkoff’s blog Present Shock is, are all these processes and mechanization always right? Isn’t it possible that the algorithms could fail and that we cause more harm than good with the way we have relied on them to such an intense extreme. In Present Shock Rushkoff details an example of this.

“A stock market  driven by algorithms is all fine and well until the market inexplicably loses 1,000 points in a minute thanks to what is now called a flash crash.”

This was exemplifying by using High Frequency Trading and the use of algorithms when predicting future share prices. While HFT trading is a huge source of revenue for companies such as BAT, when it fails it could also cripple the entire industry. These algorithms while they are useful and have predicted a huge number of stock trades many humans could not are still subject to failure and should not be followed blindly. When hearing about HFT stocks in the greater business community, for the most part there are no good things. Even in a clip from CNBC it talks about how HTF ‘s may lead to a misuse of information in a two-lane system of information. NY Attorney General Scheiderman argues that it is not within the law to allow a limited access of information to only those that can afford it. This goes hand in hand with the articles we read a month ago about how technology can only further increase this income gap through the lack of information or lack of access to key technological resources.

http://video.cnbc.com/gallery/?video=3000264583&play=1

Another result of HFT and algothrithm spring loading are traders moving away from tradition stock forums and moving to the dark pools of Geneva or what has also been deemed dark markets. These markets will only cripple the broader market more and are said to be worse than simply high frequency trading. These dark pool markets reduce transparency and most of these venues lack integrity. This could result in a huge problem for the markets and for traditional traders. In an article from CNBC that say that “We have academic data now that suggest that, yes , in fact there is a point beyond which the level of dark trading for particular securities an really erode market quality.”

http://www.cnbc.com/id/101558398

    Rushkoff states they have resort to a main strategy of avoiding spring loading situations altogether. This cause traders to lose the advantages of HFT’s trades but regain their sense of control over the market and apply their real world knowledge. However as Rushkoff states this as a solution I am also left without many answers and with many more questions. While it is all well and good to suggest avoiding HFT trades and apply your real knowledge what happens when this is unavoidable. It is certainly unavoidable to trade today without the presence of algorithms and future projections. How does Rushcoff legitimately suggest we avoid HFT’s trading short of entering dark markets, which are even more detrimental, then the existence of high frequency trading. These new forms of trading which have become more and more known are only going to strength with the passage of time and the increase in technology. Should we simply accept these forms or should we fight against them, which seems to be what a majority of the business world is doing today. Will we eventually succumb to these methods and accept them? If that happens we still have to be aware of always present risk that they might fail and that human intervention still needs to be at the forefront of our thinking. We cannot simply hand over our markets to these future algorithms and high frequency trading systems.


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Comments:


Cassaundra said...

Though I do agree that High Frequency Trading is somewhat problematic, I do not see a way we can avoid it. With HFT happening in the fashion realm wherein everything is extremely fast-paced to keep up with commerce, the risk of human error is very high. The HFT article we read earlier in the semester praises the lightening-speed technology that transmits stock information quickly, as these decisions are made practically in the blink of an eye, and therefore require a fast transaction. With human beings in these positions, it would take too long to decipher the information and transmit it to the appropriate parties. Furthermore, as Rushkoff discusses, we tend to look for patterns and links in everything, which sometimes causes us to form connections where none actually exist. This argument is not to say that overwinding, or fitting tasks meant to occur on a larger time scale into a smaller one is necessarily positive. As Rushkoff argues, “we really want access to both: we want to take advantage of all the time that has been bound for us as well as stay attuned to the real world feedback we get from living in the now. While they often seem to be at odds, they are entirely compatible, even complementary, if we understand the benefits and drawbacks of each” (Rushkoff 139). We need to make machines cater more so to how the human brain works rather than trying to program our bodies and brains to how the computer functions. Using these thoughts as checkpoints will serve as the necessary “human intervention,” but once again this solution must occur on a large scale to be effective.

// 04/07/2014 at 12:15 pm

Kevin said...

“1. The speed of HFT disadvantages other styles of trading
2. HFT exacerbates volatility in the market
3. ‘Other’ investors are scared away
4. Volume traded by HFT is therefore a dangerously high proportion of overall traded volume.”

http://www.huffingtonpost.com/john-bates/high-frequency-trading-cl_b_4393276.html

A Huffington Post article on the dangers of High Frequency Trading (HFT)outlined the concerns of Congressman Markey as stated above. In many ways, I think he is correct in laying out these concerns because, as Claire states above, it is “Spring Loading” the market in a way that could lead to a lot of problems. Because, also as Claire said, we are left susceptible to extremely quick crashes known as “flash crashes,” and how can we assume that anyone will even immediately know what to do? After all, these are very complex algorithms that are being used in order to create the patterns for these HFTs, so how can we assume that the problem would be easy to fix? Thus, we run the risk of setting the market up for a gigantic crash that we are completely incapable of controlling. However, that is only one of the concerns. My other major concern is in regards to ‘other investors are scared away’ and ‘volume traded by HFT is therefore a dangerously high proportion of overall traded volume.’

So lets say that these algorithms for HFT really do work successfully in the marketplace (at least temporarily). In that case, what kind of investor is going to go up against a machine when it comes to trading? Seeing as the algorithm is almost like a cheat code, single individuals without the cheat obviously aren’t going to want to play the game. As a result, HFTs spring load the markets even further because they become a dangerously high proportion of trading volume.

This seems great at first. The idea of having a self-sustaining trading floor is relatively enticing. However, what happens if finally the algorithm begins to fail? Then we are left with absolutely no way to get our market back on its feet because close to all of our trading volume was going through those exact HFT algorithms. This is a very scary thought, but the more commonly HFT is utilized, then the more real it becomes. Can we really trust an algorithm with the safety and success of our market?

I believe that Claire was right with her closing statement: “We cannot simply hand over our markets to these future algorithms and high frequency trading system.” It is foolish to place full trust in an algorithm because if something is to go wrong, then not enough humans will be trading on the market in order to make up for the collapse of the HFT system.

// 04/07/2014 at 5:25 pm