For algorithmic trading, the issue is simple. Some investors have determined to buy and others have determined to sell. They have reached these determinations however they have done it in the past; it doesn’t have anything to do with the advent of millisecond trading. Now they happen to decide to execute these trades over time as a function of the bid-offer spread, the volume of trading, the level of prices – that is, based on the same sorts of things that they would have without computers. And they can monitor what is going on with their trades over the course of the day. So this is not a tightly coupled process. A call to their broker, and the trading stops. Just like if the broker had someone doing it on the phone.
For high frequency trading, the issues are not as simple. It is possible to construct a scenario for high frequency trading where a strategy is widely shared which has a reinforcing feedback and which pushes forward without anyone intervening. But I can construct such scenarios even without the need for millisecond trading. Not just construct such scenarios – I have seen them, and so have you, in any number of bubbles and crashes.
Friday, August 28, 2009
Eek! High Frequency Trading is coming!
Rick Brookstaber says, the sky is not falling: