Our market system is predicated on the assumption that all market participants have equal access to information. In the real world, this is not the case. As companies pursue their interests, discoveries are made, unusually large transactions occur, and participants in the companies in question acquire material information before many other market participants. The market has rules which are intended to prevent those with access to privileged information from being able to profit unfairly. Thus, the rules against trading on insider information.
Now, as has been demonstrated abundantly, it is clear that there are other entities with access to privileged information. This information has not arisen from the normal business activities of market participants--it has been deliberately created and vomited into the market through quote stuffing in order to overwhelm the system's ability to update market prices and to create many, many, many small arbitrage opportunities.
Very few market participants can carry out quote stuffing, or can create and cancel orders hundreds of times per second. The effect is to tip the playing field in favour of these large entities, and the law of large numbers ensures that profits flow towards them. To my mind this is something very different from trading on insider information.
There is a libertarian argument insider trading is victimless and should not be considered a crime. I admit to some sympathy towards this view as it seems to fit into a kind of justice--usually someone is doing something socially useful and this creates an opportunity to make additional profit.
For those who think that quote stuffing represents a form of natural justice (IFS Bank has invested in the technology and therefore deserves its ill-gotten profits at the expense of everyone else), I would like to point out the moral difference. The money made from quote stuffing is not part of a socially useful activity. The proper role for financing has always been to make money by attempting to create something that generates cash flow, whether it be a mine, a factory, or an apartment block. Carrying out thousands of transactions per second in order to scalp fractions of pennies each time does not create wealth--it transfers it towards the HF traders.
How do we regulate the market to return it to a semblance of normality? The current market rules did not envision the kinds of advantages that can arise through quote stuffing--consequently there is no mechanism for bringing its practitioners under control. What should be done?
Quote stuffing has to be ended. One method is to place a tax on each stuffed quote, and to remove the exemptions that certain market participants hold for Exchange cancellation fees. The fact that such exemptions exist guarantees that certain market participants will hold an advantage over other participants--something that is not consistent with a fair market.
As has also been pointed out--how can such changes occur when the regulators have been captured by the perpetrators?
Now, as has been demonstrated abundantly, it is clear that there are other entities with access to privileged information. This information has not arisen from the normal business activities of market participants--it has been deliberately created and vomited into the market through quote stuffing in order to overwhelm the system's ability to update market prices and to create many, many, many small arbitrage opportunities.
Very few market participants can carry out quote stuffing, or can create and cancel orders hundreds of times per second. The effect is to tip the playing field in favour of these large entities, and the law of large numbers ensures that profits flow towards them. To my mind this is something very different from trading on insider information.
There is a libertarian argument insider trading is victimless and should not be considered a crime. I admit to some sympathy towards this view as it seems to fit into a kind of justice--usually someone is doing something socially useful and this creates an opportunity to make additional profit.
For those who think that quote stuffing represents a form of natural justice (IFS Bank has invested in the technology and therefore deserves its ill-gotten profits at the expense of everyone else), I would like to point out the moral difference. The money made from quote stuffing is not part of a socially useful activity. The proper role for financing has always been to make money by attempting to create something that generates cash flow, whether it be a mine, a factory, or an apartment block. Carrying out thousands of transactions per second in order to scalp fractions of pennies each time does not create wealth--it transfers it towards the HF traders.
How do we regulate the market to return it to a semblance of normality? The current market rules did not envision the kinds of advantages that can arise through quote stuffing--consequently there is no mechanism for bringing its practitioners under control. What should be done?
Quote stuffing has to be ended. One method is to place a tax on each stuffed quote, and to remove the exemptions that certain market participants hold for Exchange cancellation fees. The fact that such exemptions exist guarantees that certain market participants will hold an advantage over other participants--something that is not consistent with a fair market.
As has also been pointed out--how can such changes occur when the regulators have been captured by the perpetrators?
I think there's a bit of mixing apples and oranges between your two examples (the one libertarian example pointing out that insider trading benefits the supposed victim, and then taking a libertarian view to HFT).
ReplyDeleteAs I see it, Libertarians are against fraud in all forms, and for consensual economic transactions. What the exchanges need are much better disclosures as to what exactly is going on / what happens to those who trade "normally" vs. those using HFT scalping methods.
Libertarians would argue that, without clear disclosure, a fraud is taking place against those who don't fully understand the fleecing that is taking place at their expense. It is the equivalent of Firm A engaging in a transactions with Firm B, where "all fees are disclosed" and accepted by Firm B, with firm A hiding a few extra fees beneath the surface, thus charging more than disclosed. That is fraud, plain and simple.
The authorities that are assumed to protect the rights of the fleeced are simply compromised, loyal to their power and those in power. While they purport to police, they merely cloak crimes beneath their implied credibility. Quis custodiet ipsos custodes?
Such corruption, Libertarians would argue, is the natural state of bigger and bigger governments. All trades are forced into these supposed regulated trading platforms, executed by licensed professionals, etc. Eventually the herd will catch on.
Thank you for your thoughtful comment. I had this feeling of a difference between the two but could not think of how to articulate it.
ReplyDelete