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Did I Ever Say that HFT Has Ruined the Markets?

No, I did not. As a matter of fact, I believe that HFT is the modern version of the local or the specialist group but faster and more efficient and in turn the potential for markets becoming efficient is much higher. Now, some may not understand that higher efficiency in the markets means that opportunities to profit fade fast. Instead of focusing on the message they attack the messenger. No surprise here. This is typical mass behavior.

Chartists tend to equate the markets with their charts. This is an old paradigm of the mid 1990s that originated in the late 1930s when people thought that the market is an entity above and beyond its own participants. I explain this in my (out-of-print) book “Profitability and Systematic Trading” This is probably the reason that Mr. Jack Sparrow(?) crystallized this for me in Seeking Alpha:

“That meme is as follows: High Frequency Trading (HFT) has ruined the markets… This meme was crystallized for me by Mike Harris of Price Action Lab (whom I had never heard of before, but whose piece I discovered via Josh Brown).”

Besides failing to understand what I wrote, I think it is not good to for someone to start his point with an informal fallacy, which is an appeal to a lack of knowledge of the existence of someone else. This can also mean that the person who is making the appeal is not familiar with his environment very well. If Mr. Jack Sparrow (who I have also never heard of before because I am not a pirate of the 7 seas) never heard of me before, he could use Google to find my three books on trading since 1999 and a  number of articles published in major trading journals, a few listed here. I must say to Mr. Sparrow that I listen to all people, no matter how famous or known or unknown they are. You can learn something from every person in this world if you pay attention. Each person knows something you don’t, always remember that.

Back to what I said about HFT

I said HFT is bad for chartists. Now,  this is what Jack Sparrow does

Harris: HFT is bad for chartists
Sparrow: Harris said HFT is bad for the markets

A ten year old can immediately conclude using primitive logic capability that Sparrow equates chartists with the market, or maybe he thinks that the market is charts or maybe vice versa although this equivocation does not make any sense. Those who think the market is charts are getting hit hard by HFT because the market is nowdays HFT and HFT is out to profit from those who think the market is something else.

Actually, this is a post I wrote not to long ago about the winners and losers of technical trading. In this post I argue that HFT is a technical trading style with superior profitability.

Now, as far as the statement by Mr. Sparrow below:

“The game is odds and probabilities, not prediction “

I would like to kindly ask him: ” How do you know the probability of a classical pattern, like a double bottom for example, you spot on a chart”? Or even worse:  “How can you calculate the probability of any strategy that incorporates classical chart patterns?”

Unless he can provide a quantitative answer to this question, everything he has said is the null set. But he won’t. Actually nobody can do that. An exception is Thomas Bulkowski, who I respect and admire for the hard work his has put into this but I still think his sample was limited and pre-HFT. Chart analysis is a naive attempt to predict the future, no different than astrology. Even worse than astrology, often it is wishful thinking and reflects the directional bias of the analyst. This is so basic but also so devastating that makes chartists react emotionally. But the sooner they understand it the better for them. I am trying to help them, not to attack their goose that laid the golden egg:)

But as I have said here before there are some that for some reason they are very good in analyzing charts and predicting market moves. Maybe Mr. Sparrow is one of them, especially when the seas are calm and he can draw straight lines and count the waves of the markets. But some others claim that their analysis is good because a very famous analyst praised the use of similar patterns once, maybe 60 years ago.

HFT is good for the markets and the economy if regulated properly because it accelerates price discovery, especially in the futures markets. It has not ruined any markets but it has only showed that those who do not keep up with the technological progress fall behind.

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