The Technical Achievements of High Frequency Trading

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The Technical Achievements of High Frequency Trading

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If you aren’t familiar with high-frequency trading, I’ll bring you up to speed a bit, but you may want to read this in-depth guide to familiarize yourself some more.  It goes pretty deep into the nitty gritty from a technical point of view but also legal, regulatory and practical affects of the practice.

What I wanted to talk about today were a couple of the outstanding and noteworthy technical achievements of high frequency trading and what they mean to me from a philosophical perspective.  Whatever your ethical stance on the matter is, I think we can all agree that it is a marvel of capitalistic as well as technical achievement.

“The Frontiers of Capitalism”, Quite Literally

Business and sales Guru Chet Holmes used that term often, “the frontiers of capitalism” to describe his innovative approach to sales and the overall approach that salesman and business owners take to growing their business.  I think it fits absolutely perfectly with the concept of high-frequency trading, and while I think the ethical nature of the practice is quite dubious, I have to respect the initiative and innovation.  Taking anything to the barrier of concept and going beyond it is a giant achievement, and I think it should be respected, if not admired.

Philosophically speaking, the concept of essentially interupting a sales process, by microseconds, and undercutting/overpricing a bid, is something that only a the information age can do.  While we may have always had middlemen, there was a time and place for them, and they often provided a service.  It can be argued whether that service was worth the price they charged, but in any case they were there to enable a transaction to occur.  With the information age this has become programmatic, and the “service” aspect of the middleman has essentially disappeared.  This makes the process ethically dubious and it is starting to become a legal grey area as well.

But that’s not what impresses me.  It’s the initial fact that some figured out you could do this, set up million dollar systems to get it done, and then started competing with other people that did it.  They went from hi-speed fiber-optic cables connections from Wall Street to Jersey City, to multi-state Microwave Transmission Towers from NYC to Chicago, just to shave a couple of microseconds off the tranmission time.

And this is all getting powered by a capitalist endeavor that doesn’t have to do with free market, but just has to do with the technical infrastructure that a marketplace utilizes.  Using computer systems to run global finances has allowed those with more computing power and speed and know-how to come in and arbitrage the entire system!

Not to mention that making pennies off millions of transactions sounds remarkable similar to the Superman 3 penny pinching scheme!  It’s crazy!