Not too long ago, a Russian programmer was picked up by the FBI for circulating what may be Goldman Sachs proprietary HFT (High Frequency Trading) software. Essentially, much of the volume in today’s markets is entirely driven by computers making minute decisions about penny trades on the smallest of fluctuations to derive an arbitrage situation and exploit it through volume. To make it even more interesting, the software is designed to carefully layer its moves in attempts to hide its intended activity from rival HFT algorithms doing the exact same thing; this reminds me somewhat of an old school programming game CoreWar where code was designed to annihilate it’s competitor in RAM and hide what it did from that same competitor. All of this makes sense from a trading perspective, get the edge on your peers and do so in a way that makes you the most money. My problem with HFT computing is that it seems diametrically opposed to the concept of opening a company to the public for investment as a means to raise capital. With HFT, the markets are not a forum for raising capital anymore or making investment in a company, they’re simply a place to exploit mathematical trends causing the sale of what could be a fantastic organization or the purchase of crap simply based on a prediction model. Granted, according to the article on HFT there are variables allowing for human input to lean the algorithms towards certain less tangible abstracts like hunches … but at its core, it’s still a math program looking for the same thing as everyone else’s math program which makes the market react in swings.
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