Clifford S. Asness and Michael Mendelson wrote1200 words of
gobbledygook to say that when a middleman stands between you and someone
selling something, you pay less money, the seller gets more money, and the middleman
makes a profit too. How does that miracle come about? They say they don't know;
they even say they are not sure it happens at all. But take it from them who
know the business because they know that good things happen when High Frequency
Trading (HFT) is done.
You must think I am kidding you. Hell no, I am not. See for
yourself because those two wrote an article under the title: “High-Frequency
Hyperbole” and the subtitle: “Beware of critics who are 'talking their book'
about trading that lowers costs.” It was published in the Wall Street Journal
on April 2, 2014. Somewhere in the article, they ask the question: “How do we
feel about high-frequency trading?” And they answer: “We think it helps us. It
seems to have reduced our costs. We can't be 100% sure. Maybe something other
than HTF is responsible.” Keep in mind that these people do buying and selling
all the time. When they say they are being helped, it means they save when they are buyers and when they are sellers. That's the miracle!
That is good for them and their clients, they explain, who
are not high frequency traders. In fact, they go on to reveal the following:
“Here is where our interest lies: What is good for us is lower trading costs
because it translates into better investment performance and happier clients.”
Still, the question remains as to how their costs are lowered when a middleman
gets paid for every transaction they get into – be it buy or sell? This is how
they answer the question: “We devote a lot of effort to understanding our trading
costs, and our opinion, derived through quantitative and qualitative analysis,
is that on the whole high-frequency traders have lowered costs.” You want to
shout: Please explain how, and give examples.
They don't answer that question directly because a direct
answer would expose the fraudulent argument they are making. What they do later
in the article, however, is get deep into a gobbledygook they construct on top
of a lie. Here is that part: “Much of what HTFs do is 'make markets' – that is,
be willing to buy or sell stock anytime.” No, that's the lie; it is not
“anytime.” The rules are that the market makers will each specialize in one or
more stocks that have fallen out of favor and trade lightly. To make sure that
a market is always available to someone that wants to buy or wants to sell, the
specialist will be ready to accommodate such client either way. He will have
indicated beforehand at what price he is willing to buy, and what price he is
willing to sell. Most of the time the spread between the two prices would be
wide indeed, but they would have been set ahead of time and listed on the
exchange. What is illegal to do is for the market-maker to change the listed
price upon seeing an incoming order, and before the would-be buyer or seller
has had his order filled. This is front-running the market; it is illegal; it
is a crime. And this is what the HFTs do with every transaction millions of
times a day.
Moreover, Asness and Mendelson admit that some HFTs “push
the envelop at times. Some of them may negotiate advantages that might be bad
for markets. Worse, these arrangements tend to be little understood by the
broader range of market participants.” Without explaining any of that to
reassure their readers, they simply say: “We shouldn't get ourselves dragged
into a hyped-up war over a matter that doesn't affect investors very much – and
where, to the degree that it does, we'd argue that the effect is easily a net
positive.” Did they say they'd argue? Please do. Please give us your argument
Mr. Asness, give us your argument, Mr. Mendleson. We're dying to know how this
can be a net positive for us.
So then, why is it that people who do no High Frequency
Trading are in favor of it? You can tell why by one phrase that used to be in
vogue but is missing in this article, and dropped altogether from the everyday
conversations. The phrase is “increased liquidity.” These are code words to
mean inventing all sorts of tricks and situations to get the Central Bank to
print more money, and hand it to the financial institutions and their clients.
When liquidity is increased, an asset class such as real estate or stocks, is
inflated and used as collateral to have the bank print more money that inflates
the assets even more that causes the bank to print still more money and so on
till the bubble bursts, and the economy goes into a tailspin hurting millions
of people.