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Paul Wilmott Lashes Out At HFT, Laments Groupthink And Bandwagoning Of The Binary Churners

Tyler Durden's picture




 

Zero Hedge's view on the systemic threat that HFT poses to markets, a topic beaten to death on the binary pages of this website, is gaining ever more supporters each day. The latest to lament the lack of imagination, creativity, and work ethic, and to caution against the greed, bandwagoning and groupthink of the binary churning crew know as the HFT lobby is Paul Wilmott, in yet another scathing critique of all that is rotten with modern market structure. One would hope after 10 years of increasingly more vocal complaints and a few hundred more flash crashes, even the incompetent illiterates at the SEC will finally pay attention and put an end to this travesty. 

From Paul Wilmott's blog:

"The truth is the high-frequency traders create volatility and create liquidity," said John Damgard, president of the Futures Industry Association.

What he apparently meant to say was that they reduce volatility, not create it. And this was just a slip of the tongue. As Sigmund Freud observed, such slips can reveal the reality.

I am concerned about High-frequency Trading (HFT) for two main reasons: Reduction of the relationship between value and price; Potential for positive feedback.

Markets exist to enable businesses to raise money, to expand, to thereby employ people, and so on, for the benefit of society. This only works if the market does a decent job of revealing the true value of a company via its share price. Otherwise the market is no different from a casino, a share price may as well be given by the spin of a roulette wheel. Fundamental analysis is supposed to do a similar job. You analyze a company, study its customers, research the management, etc., and come to a conclusion. But fundamental analysis is hard work.

Much easier is to run a data feed into a black box containing some algorithm, then optimize that algorithm. Your HFT black box doesn't care a hoot about the true value of a company, it only cares about what happens to the price over the next few seconds. You may spend a few months setting up this black box the first time, but thereafter you can apply it to a wide variety of markets with relatively little effort. Just re-optimize for that market. (And we know from how market players are compensated that the question of whether or not the result is long-term profitable is of second-order importance.) Not so with fundamental analysis, each market is different, each requiring the same weeks of hard work.

The above wouldn't matter if the HFT boys didn't dominate the market. Is it now 70% of trades on some exchanges are HFT trades?

Whenever you have a bandwagon, such as HFT now is, then you have the potential for systemic risk and feedback. Remember the last bandwagon…the credit products. How did that one turn out for the world economy?

How did we find ourselves in this place? Because the HFT boys cleverly played the "liquidity card" at the right time. The argument goes along these lines: "When Mom and Pop want to sell off some of their portfolio to fund their retirement then they'll get a better price if there's more liquidity. So liquidity is good." True! For the shares they've held onto for 20 years they will indeed get an extra cent. Whoohoo! Break out the champagne! So you mustn't argue with the liquidity card. The more the merrier, right? Well, no. The fact that during those 20 years their shares have lost 50% of their value thanks to the Great HFT Crash doesn't ever get mentioned. One extra cent versus a 50% fall? Hmmm.

Read the full thing here

 

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Tue, 06/29/2010 - 11:57 | 441626 firstdivision
firstdivision's picture

He has spoken out against financial innovation and HFT for awhile now.  He is one of the most respected quants in the world and none of the powers that be will listen to him. 

The king of the kingdom is helping to start the revolt against it.  Should get interesting :)

 

 

Tue, 06/29/2010 - 12:49 | 441829 scratch_and_sniff
scratch_and_sniff's picture

This modelers' manifesto was signed by the man himself Paul Willmot, and Emanuel Derman in jan 2009...its something all quants obviously understand, but most of them are as suceptible as your average man in the face of big and fast rewards.

 http://www.scribd.com/doc/33706130/090107-the-Financial-Modelers-Manifesto-fmm

 

Tue, 06/29/2010 - 11:56 | 441644 Turd Ferguson
Turd Ferguson's picture

Man, am I glad to see this. Maybe now she'll finally stop calling me every day. My wife was starting to get really pissed.

http://omg.yahoo.com/news/megan-fox-and-brian-austin-green-are-married/4...

Tue, 06/29/2010 - 11:57 | 441649 firstdivision
firstdivision's picture

She was calling you?!?  I was only getting booty texts.

Tue, 06/29/2010 - 12:01 | 441663 Temporalist
Temporalist's picture

I guess they are in an HFT marriage?  Huge Fucking Travesty?  Holy Fucking Tards?  How Fucking Tragic?

Tue, 06/29/2010 - 22:47 | 443418 StychoKiller
StychoKiller's picture

Hey, this could be the marriage that refutes the rules in Hollywood.  Just sayin'.

Tue, 06/29/2010 - 11:58 | 441655 London Dude Trader
London Dude Trader's picture

Wow! Imperial College's Paul Wilmott is one of the world's top academics on derivatives, right up there with John Hull. 

 

Tue, 06/29/2010 - 12:30 | 441767 Cheeky Bastard
Cheeky Bastard's picture

I would add Turnbull as well to that Pantheon of Quants. Not as significant as Wilmott and Hull [Hull practically singlehandedly defined and mathematically described most of what constitutes the structure of the CDS] but certainly a big contributor to CDS pricing and various other CDS related issues.

Tue, 06/29/2010 - 12:02 | 441665 economessed
economessed's picture

Let's pull the plug and return to open outcry.  At least then we'd have some accountability.

Tue, 06/29/2010 - 12:04 | 441668 Temporalist
Temporalist's picture

Another voice added to the crowd, sadly it will fall on the deaf ears of the morraly corrupt politicans, banksters and economists.

Tue, 06/29/2010 - 22:48 | 443420 StychoKiller
StychoKiller's picture

Everyone ignored Chicken Little too, until a black hole swallowed their planet...

Tue, 06/29/2010 - 12:06 | 441686 MarketFox
MarketFox's picture

ONE SECOND minimum....

 

Problem goes away....

Tue, 06/29/2010 - 12:07 | 441689 sumo
sumo's picture

Isn't Wilmott's site where the continental HFT quants hang out? Algodeal, for instance, trawls there for new talent:

https://beta.algodeal.com/home.html

Tue, 06/29/2010 - 12:20 | 441734 Waterfallsparkles
Waterfallsparkles's picture

I think the HFT counts trades.  Kind of like counting cards.  If a lot of Traders buy the computer then sells the stock down about $7.  until thoes traders Sell.  Then the Computer Buys.  Works the same with Short Selling.  A lot of people short a stock the Computer then buys the Stock up about $7.  Then Sells heavy.  This counting of Trades allows the Computer to do the opposite of the Masses which causes most traders to end up selling their stocks at a a loss or buying back at a loss every time.

For this to be effective it has to be done over a 3 day time frame to make sure that anyone on the wrong side of the trade has to liquidate at a loss thru Margin calls.

Tue, 06/29/2010 - 12:22 | 441743 doolittlegeorge
doolittlegeorge's picture

looooony, loony, loony.

Tue, 06/29/2010 - 12:33 | 441773 centerline
centerline's picture

Can't shut down the containment grid.  LOL.

Tue, 06/29/2010 - 13:07 | 441902 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

No one every complained about the HFTs until the '08 crash struck. Now just a few point out the obvious flaws. Most likely those who do not make money on the HFT. For all of those on big boys on Wall Street, it is all fun and games until you are unemployed, broke and homeless.

Tue, 06/29/2010 - 13:22 | 441970 Waterfallsparkles
Waterfallsparkles's picture

What I hate most about HFT is that they apparently program in the "Price" for the Day.  They push the Stock to that price and then Churn it all day long.  Appears to me like price fixing.  They establish the price for the day and you either buy or sell at the price they determine.  HFT is used to hold the price all day.

It used to be that a Stock would go up and down during the day.  You could get out of a bad position but now you are stuck if you are on the wrong side of the trade.  You have to either sell, buy or buy to cover at the price they determine in their Black Boxes.

Total Price an Market Manipulation.  Yet, SEC will not change it as the Computers are making too much Money Robbing the Middle Class.  The Middle Class does not have enough money to "Bribe" I mean contribute to the Senators and Congress peoples Campaigns.  Or hire the SEC watch dogs for $500,000. a year after they ignore the obvious Legal problems with HFT.  Frontrunning, Price fixing, Market Manipulation and Churning.

Tue, 06/29/2010 - 22:51 | 443424 StychoKiller
StychoKiller's picture

No matter what the computers are doing, I refuse to play their game!

Tue, 06/29/2010 - 13:28 | 441996 peterpeter
peterpeter's picture

> The fact that during those 20 years their shares have lost
> 50% of their value thanks to the Great HFT Crash doesn't
> ever get mentioned.

It doesn't get mentioned because it is rubbish.

On a large enough sample size, shares lose 50% of their value because the purchaser bought them when they were over-priced or sold them when they were under-priced (or some combination of the 2).  Those are decisions (poor ones) taken by humans.

There was no HFT crash.  There was a global binge of debt that naturally had to come to an end, much as previous episodes in history had (many before the advent of a computer).

If Paul believes that HFT somehow creates feedback loops that drive prices away from their fundamental values for periods of time until they snap back, then he is describing a market in which someone doing good fundamental research would be making a killing over the long term...

 

Tue, 06/29/2010 - 13:53 | 442094 scratch_and_sniff
scratch_and_sniff's picture

"There was no HFT crash.  There was a global binge of debt that naturally had to come to an end"

The Great HFT crash hasnt happened yet. I think thats clear enough from the article, if you took the time to read it.

"Whenever you have a bandwagon, such as HFT now is, then you have the potential for systemic risk and feedback. Remember the last bandwagon…the credit products."

 

Wakey wakey!

Tue, 06/29/2010 - 13:41 | 442023 carlo
carlo's picture

Waterfallsparkles ......... I agree with you. I also think that thru the enactmement of the "national emergency act" that our leaders are allowing Goldman Sachs and their ilk to sensetive information that exchanges possess based on who's shorting, selling long, buying or just plain open interest with hedges subtracted. All this info is readily available on a second to second basis. It should be confidential, but for the sake of re-capitalizing these major financial institutions I believe the info has been compromised.

 

By the way .... just got a real easy math question instead of those double negative subtractions .... woo hoo !!!

Tue, 06/29/2010 - 16:32 | 442638 Waterfallsparkles
Waterfallsparkles's picture

Yes, with the HFT Computers they can count and store the amount of Buys, Sells, Short Sells, Buy to Cover trades on a minute, hourly or daily basis.  They then can do the opposite this forces Traders to cash out of their losing trades for a loss.  No wonder they are making millions a day without a losing day for almost a year.  How many people could do that?

Although, it really does not hurt that CNBC seems to know what direction GS and their HFT is taking the Market and work very hard to get you to sell when the Market is Down and Buy when the Market is at the Top.

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