My Take

When computers take over trading …

PUBLISHED : Monday, 14 April, 2014, 4:28am
UPDATED : Monday, 14 April, 2014, 7:33am

Take an obscure subject and some special writers can turn it into a spellbinding tale. Who cares or really knows anything about high-frequency trading (HFT)?

Now, Michael Lewis has made everyone worried about it. That is the kind of skill that rightly makes Lewis probably the most celebrated finance journalist of this generation in the English-speaking world.

Everyone I know, including my 81-year-old mother, has read Liar's Poker - the book that made him famous - about his short time as a bond salesman on Wall Street. I told my mother to read it so she would trust her Toronto stockbrokers less. Still we both think those on Bay Street are less ruthless and unpleasant than those on Wall Street.

Lewis has now published Flash Boys, his latest book about how HFT rips off everyone. Presumably it's not just in the US. Hong Kong Exchanges and Clearing has a brand new, HK$1.5 billion data centre in Tseung Kwan O that allows for "co-location", enabling HFT to be in close proximity to its servers.

It's the kind of book that you can read effortlessly in one or several sittings. Before you know it, you wish you hadn't finished it. But what really bothers me is not what outrages Lewis and many of his readers. So what if HFT firms skim a few cents off every trade I make? Sure, that adds up to fat profits for HFT traders, but tiny losses for retail punters like me.

What is really troubling is that computerised or algorithmic trading, of which HFT is just one type, proves you don't need humans to trade at all. It's just another field where humans have become inefficient and superfluous.

What's to stop a vast digital simulacrum of capital markets in which computers trade with each other without regard to the purpose and well-being of the human owners of equities and debts? Well, most of the humans anyway.

Presumably, the algorithms and the machines will still be owned by some financial (human) overlords, like retired hedge fund supremo and mathematician Jim Simons of Renaissance Technologies. The vast gulf in technology and knowledge between someone like Simons and a retail investor is like that between a god and a mortal.

Talk about income inequality!