Making fairer trading markets
Off research topic's, there was a nugget of an NPR story the other day that caught my attention. The story was that the guy about to take over control of the New York Stock Exchange thinks high frequency trading is bad.
Planet Money had a good story a while back telling the story of computer trading from the perspective of one guy, Thomas Peterffy. High frequency trading (HFT) began gaining attention after the 2008 financial meltdown, as attention shifted from complex securities which could be difficult to value to safer methods of arbitrage that offered profit at no risk. Public awareness sprang up as a result of the 2010 flash crash (see Letter to SEC from "The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues") Today, the technology of high frequency trading and market making is impressive and seductive.
But things have progressed to a point of absurdity, with nanosecond time-scales controlling the outcomes. There is a mathematical explanation for this. It's a well-known phenomena in dynamic optimization and dynamic game theory that some problems lead to "chattering controls", where the best strategy involves making moves as fast as possible, and that first-mover advantages arrising from a slightly faster reaction time can be insurmountable. But there is often some small element of the dynamics that can be changed to restore fairness.
HFT is not making our world a better place. To common sense, it now seems almost certainly a collusion between trading firms, hedge funds, and exchanges to steal massive amounts of money from all the rest of us through arbitrage. It seems like some speed limits would help project us. Here is a company trying to help with this by disrupting the current market.