A friend of mine is a top trading system developer. I asked him for his thoughts on high-speed trading, and he responded as follows:
“Without really diving into the entire issue with both feet, my random comments would not do justice to this topic. I write code, not books, as you know. I might say that Goldman Sachs (GS) is not the only player in the box. If Sergey Aleynikov [a former Goldman employee accused of stealing trading software] could get code out of Goldman, there are probably others. I’d hate to be on the (GS) receiving end of a really dedicated counter-predatory ‘market harvester.’ I doubt that the markets will become the war zone with collateral damage with the magnitude that [some believe]. [Hedge fund] LTCM had Nobel laureates on board and they blew up.
“High frequency trading (HFT) is the most profitable category on Wall Street right now, however. News is still moving the markets, and machine-readable news can be hooked up to algos. By the way: GS does not have our algo unless they are stealing patents. We make this algo [commercially] available to ALL traders, and we are not alone. Circuit breakers will probably increase in use and regulation will probably increase.
“Regulators are not real happy with GS, in my humble opinion. The Bloomberg-tapping trader in Bermuda shorts trading FOREX is simply being replaced by the shorts-wearing FOREX trader running his own personal algo. More sudden market moves have happened due to fat-fingered errors than algos. The leverage unwind set upon us by us helping people get into houses that they could not afford has hurt us more than GS’s algos. We can do much by voting in leaders that have common sense. Who really wanted to ‘Equalize Housing’ in an unequal world?
“My advice: Work hard, act smart, be careful and if in doubt…stand aside. Merton-1936 Law of Unintended Consequences #1 reason….Ignorance. #2 reason: Error. Nothing has changed, we just have ‘evolved.’ Back to the GP code now….”