The Only Game in Town

High frequency trading is not real trading at all; it is a question of who can invent the best algorithm and pitch it against other algorithms and any sucker who joins in the market. These so called trades are carried out hundreds of times a second, and the fractional profits or losses that are created as a result can quickly mount up. So far high frequency trading is not illegal unless there is an element of market manipulation involved, although it is hard to see how high frequency trades can do anything other than create an artificial market. The market, whether in shares, bonds, commodities or esoteric derivatives is enough of a casino, but high frequency trading tries to play the odds, just like a skilled poker player.

Some high frequency algorithms go further than simply trying to design a formula to beat the market; they can manipulate a market, as recent fines made by regulatory authorities on some traders show.  I have yet to understand why high frequency trading is permitted in what are supposed to be markets. Markets work, if they work at all, by matching buyers with sellers and buyers and sellers usually have either an end use for what they buy or sell, even if that end use is merely resale.

As to why we should permit sales at fractions of a second to govern the price of food, energy, fuel, commodities and investments is beyond me. Governments seem quite comfortable with it. Market regulators seem quite comfortable with it. Traders and investors seem quite comfortable with it. I and perhaps many non market participants (except to the extent that we buy food to eat, energy to use and investments for our savings) are very uncomfortable with high frequency trading.

Perhaps the reason is our addiction to a belief that markets are the best form of economic organisation and therefore wshould be left free and unhindered. Perhaps there is a deeper reason, one that is in our psyche.

I recall the story told to me by Slippery Syd.

A traveller checks into a hotel for the night and asks the bell hop if there is a poker game in town. The bell hop tells the traveller that there is only one game in town but, but do not play in the game, because it is crooked, and he will lose all his money.

The next day the bell hop sees the traveller, who complains that he played poker in the bar and lost all his money.

“But I told you, it is a crooked game, why did you play?” ask the bell hop.

“Because,” says the traveller, “it was the only game in town.

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