High frequency trading spoofed in The Daily Show
December 15, 2009
From Hila Lifshitz, a graduate student at Harvard Business School. Here’s an excellent spoof of high-frequency trading in The Daily Show.
In my view there are three lessons emerging from the show. First, this trading practice is hitting the mainstream, which means that the potential problems it poses will probably now become real. Most financial innovations only become dangerous once they are widely adopted, as they pose risks as a result from their interactions with other innovations. This was the case, for instance, of portfolio insurance and of mark-to-market more recently (see Holzer, B., and Millo, Y. (2005) From Risks to Second-order Dangers in Financial Markets: Unintended Consequences of Risk Management Systems. New Political Economy 10(2): 223-246).
Second, as with equity derivatives in the 90s and credit default swaps more recently, high-frequency trading is being branded as impossibly complex, and outside the province of the layperson. We should expect much more myth of this time in the near future. I wonder whether the media are doing a disservice to investors with so much Da Vinci Code.
Third: despite humor, the spoof hits on one of the real issues that hang over the practice: what value does it add for investors? One view on this matter is that high-frequency adds liquidity. But the question this raises is whether adding liquidity for minuscule periods of time amounts to a “real” liquidity — an issue of ontology, no less.