The inveterate whiner and liberal Michael Lewis it at it again, stirring a tempest in a teapot over ‘high frequency spoofing‘. He should stick to writing about baseball. It’s the only subject he is capable of writing about without sounding like a shrill ninny.
For brevity, I’m not going to discuss the ethics of trade spoofing. In reality, none of this really matters – a fact that comes to light up looking at the actual empirical evidence. The outrage over algorithmic trading, whether it be spoofing, penny jumping, ghosting – whatever, is predicated on the belief that such activity makes the market more volatile, and that the ‘little guy’ is being exploited in the process. But in reality thanks to increased trading volumes, spreads between the bid and ask are thinner than ever, meaning cheaper executions to enter and exit positions, as shown below:
As for crashes, why can’t the left accept that the May 2010 Flash Crash was such an extreme anomaly, and that it’s impossible to infer a ‘long standing’ trend from it. The ‘flash crash’ was not a symptom of anything, nor a sign of anything. It just happened, and was quickly over. That’s it. Sometimes a cigar is just a cigar. Sometimes a crash is just a crash. People get scarred, they sell, prices go lower, more people get scared…repeat. The end. Consider the empirical evidence…if the markets are so vulnerable to this nefarious activity, to invoke the Fermi paradox, why aren’t there more flash crashes? Why has there only been a single event like this in over…five (and counting) years? You would think that if all this high-frequency stuff were a big deal the market would be gyrating 1-4% every day, but it’s not. In fact, since 2011 market volatility has been persistently low. A ‘big’ sell-off these days is half a percent. Whatever is going on behinds the scenes is so trivial in the grand scene of things that unless one pays very close attention to the market-microstructure, there is nothing aberrant. And then keep in mind similar crashes to the Flash Crash occurred in the 90’s, specifically in 1996, 1997, and 1998, and then there were similar crashes in 1987 and 1989, long before high frequency trading became a big deal. Markets have been ‘flash crashing’ ever since the existence of markets. Another problem is that crash-models fail to take into account fundamentals, which prevent the market from falling below a certain threshold. You cannot have a continual feedback loop if such a loop results in prices substantially deviating from the underlying fundamentals. Someone always steps in and ‘rights’ things.
Cassandras like Michael Lewis need to stir unnecessary outrage and fear to make a living and to bring attention to their leftist causes, and that’s why it’s important for bloggers such as myself to debunk the left’s nonsense since its easy for people to otherwise be mislead .
Related: Misconceptions About Algorithmic/High Frequency Trading