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Monthly Archives: April 2014

A simple explanation of why HFT is rigged

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High Frequency Trading ( HFT ) is finally being openly debated in the media , ( mainly thanks to Michael Lewis and Bloomberg News) and there are on-going investigations by the FBI currently in progress.

Traders and Bank Insider are protesting like snarling lions at any suggestion that the market is ‘rigged’ in favour of High Speed Traders. However, anyone who has read Michael’s new book,  Flash Boys, and has taken the time to understand the consequences of absorbing HFT’s into the fabric of the Exchanges themselves, will clearly see that their arguments are founded on very dubious grounds.

The main contention from the HFT lobby is that the ‘system’ currently operating gives beneficial liquidity to the Market and has lead to a significant fall in trading costs to “Joe Public” .  This is certainly correct, and on the face of it does not seem to indicate a “rigged” market. (ie falling transaction costs and substantial capital fluidity usually indicate a free and un-rigged Marketplace )

Their second contention is one of  “free market innovation” ;  by which they mean that the mechanisms that have brought about this liquidity – the nanosecond buy/sell order book transactions – have come about as a natural result of their own capital investment in new trading technologies, algorithmic-driven bots and advanced computerization etc.  They contend that it is “natural’  for major players who invest heavily going forward to have a competitive edge over others who fail to adapt and invest.  This all sounds very plausible.

But …. and its a very big but … The assertion by High Frequency Traders that all they are doing is essentially benefiting from their own shrewd capital investment and innovation-driven practices and policies is a fundamental deception, because – in reality – it is allowing them to bypass the regulations that are in place to protect the operation of a free market.

A level playing field, everyone knowing and abiding by the same rules, are essential for on-going public confidence in any activity. Insider trading,  benefiting from prior knowledge obtained secretly, or let’s not be prudish “Cheating” ,  is quite rightly outlawed and a criminal offence.

So, here is a simple sporting analogy that explains why High Frequency Trading should be seen for what it rightly is .. a rigging of the game. Or more accurately, a knowing deception to cheat against ‘Joe Public’ by those HFT players over non HFT players.  All trading is essentially ‘placing a bet’ that your chosen option will win over somebody else looking at the same set of circumstances. High Frequency Traders merely say they can predict the market results better, and act sooner, because of their advanced technology and investment. So let’s examine that claim.

In NASCAR, – or say Formula One Racing outside the USA  – huge capital investment is needed to run successful teams. The winning teams almost always are those with the biggest innovation budgets, most up-to-date technologies and RD development. The drivers are of course part of that mix, but if you put a top driver in a third rate car, he isnt going to win The Race.

We all can accept that variation, because that’s part of a capital and investment-driven free market activity. But there are “rules and regulations’ that are put on The Race.  The most important being that ALL drivers race on the same track, all start at the same time, and the “winning post” is at a universally pre-determined point.

So, if  HFT’s were watching their screens and betting on a NASCAR race they would have no advantage over a ‘Joe Public ‘ Punter watching the same Race on his own TV screen.   But what is actually happening is that they are on a more rapid “cable feed”, than anyone else, so their information on the Race is arriving ahead of the “Joe Public” punter.

What makes this even more ‘rigged’ is that the HFT players are in fact actually associates in the betting office, so not only do they know the result of the Race in advance of Joe Punter, but they know which bets all the other “Joe Punters”  have placed and are able to cream off the odds by placing their own “winning odds” bets,  as they know already know the result.

Now, explained like that, everybody would say that was “cheating” and “rigging the market”. So I would love the HFT’s themselves to try and explain why this isnt actually what they are doing ?

Oh, and by the way,  does the FBI watch NASCAR ?

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Bitcoin is the New “Rock ‘n Roll” ! !

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The emerging bitcoin community is today at the turning point of mass acceptance, and the evolution of bitcoin is very reminiscent to me to the history of the rise of Rock and Roll. ( I’m old enough to remember those days – will be 65 in a few months !)

The roots of Rock and Roll grew out of a disenfranchised underclass, with no voice in the mainstream, and sharing the need to articulate their ideas, hopes and aspirations among their own community. ( ie similar to the early geeks in their ‘bitcoin basements’ )

The early ‘musical vibe’ of rhythm and blues was picked up and introduced to a youthful white audience anxious to also express their dissatisfaction with the status-quo  through the “safe and sanitized” Colonel Parker/Elvis promotional model.

This isn’t knocking The King, just pointing out that he wasn’t really an ‘infant terrible’. However, Elvis in his early years was equally vilified and ridiculed by the Main Stream Media and the entrenched ‘musical establishment’, very much as bitcoin has been in its own second phase.

In the mid-sixties, The Beatles Revolution brought mass music to the world-wide teenage population, and spawned thousands of bands – ‘ kids in their garages ‘ – but the Beatles weren’t really “rock and roll’.

In the sixties, teenagers were split into two camps. The mop-top supporters of the Beatles listened to music that even had their parents tapping their feet , they were adored by the Media and received OBE’s at the Palace from Her Majesty the Queen of England. Whereas the long-haired Rolling Stones were the ‘bad boys’, outspoken, drug taking, anti-establishment figures. Pure evil ‘rock and rollers’ – someone you certainly couldn’t take home to Mom and Dad.

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So let’s examine the career of these adolescent bad boys of rock and roll – epitomized by Mick Jagger and Keith Richards – from rebels into their existence today as probably the Iconic Surviving Rock Band, adored by celebrities , still playing at Presidential Parties and fund-raisers , almost unrecognizable from their early roots.

You could certainly make the case that the career of the Rolling Stones closely mirrors how bitcoin has developed up to now, and where it will be going in the coming decades.

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Phase One – an articulate unrepresented underclass , communicating among themselves, nerdy kids in garages and basements, ridiculed for partaking in activities that were incomprehensible to the Main Stream.

Phase Two – rebellious, now ‘out in public ‘ loud, kicking the boundaries, some arrested for drug related activities ( Yes, Charlie Shrem is the new Keith Richards !)  bitcoin is now feared by the establishment, but growing in momentum with every month, and surviving all the ‘bad publicity’. Indeed , in the Rock and Roll World the saying goes – “there is no such thing as bad publicity, any publicity is good publicity” and this seems to be true also for bitcoin. Bitcoins adoption has certainly not been hurt by the recent ‘bad publicity’ of all the Main Stream Media reporting of Mt Gox, etc

Phase Three – getting invitations to the ‘top table’ (moving away from the Beggars Banquet ) . This is essentially where bitcoin is moving today. For example , see Barry Silberts quote on twitter on march 23
“Had requests from 38 institutional investors representing +$250 billion to meet with me re bitcoin at Barclays Emerging Payments Forum tomorrow”

Phase Four – Mainstream Acceptance, “I can’t imagine what the rock world would have been like without the Rolling Stones “.   This is where the bitcoin community is going.   Before the end of this decade it will be impossible to imagine a world without bitcoin and the blockchain protocol.
Bitcoin truly is “The new Rock and Roll”

 

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Keith Richards

 

The 66-year-old lead guitarist has recently written” Life”, a memoir about his early musical influences, his time on the road with , his run-ins with the law and his occasionally contentious relationship with Jagger, the Stones’ lead vocalist.

 

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I’d like to think that in 40 years time , a similar memoir will be written by Charlie Shrem –  Go Charlie !

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