HFT and Academic “Research”
We have written this week on the influence of the HFT lobby and how they are trying to gain influence in Washington. Today, we would like to talk about another propaganda arm of the HFT machine: the academic community.
We hear often from proponents of HFT that there is no academic research that HFT is doing anything wrong. And then we hear about all of the “research” by academics like Brogaard and Hendershott and we are supposed to believe that HFT is just adding liquidity and shrinking spreads. Like the traffic cop at an accident scene, the HFT proponents want investors to “move along because there is nothing to see here.”
We just read an interview in The High Frequency Trading Review Read interview here (yes, we are subscribers) which featured another pro-HFT academic, Professor James Angel of Georgetown. You may have heard of Professor Angel. He was one of the authors of the “Fairness in Financial Markets: The Case of High Frequency Trading” as well as the paper “Equity Trading in the 21st Century” which was sponsored by Knight Capital. According to his bio, “Professor Angel has also served as a consultant to broker-dealers, stock markets, and law firms.” He also serves as an independent director to the DirectEdge for-profit stock exchange. The good professor is well versed in the equity markets. He can often be seen making the rounds at the conference circuit as well as testifying before the House Financial Services committee. In his HFT Review interview, Professor Angel (aka Dr. Jim) had this to say:
“Those who understand trading and understand the business generally see that it makes sense, but there are a large number of people out there who trade but don’t really understand trading. They have this sort of visceral fear that somebody is “sticking it to them”. Out of their ignorance they blame the people who use computers to trade, because of this false meme going around that high frequency traders get an advanced look on their orders before anybody else does.”
Let’s climb down off the Ivory Tower and look closer at what Dr. Jim just had to say about all of us market participants who dare to question the status quo. First, Dr. Jim assumes a large number of traders could never be as smart as he is and even calls them ignorant. Then Dr. Jim says that the notion that HFT gets an advanced look at orders before anyone else does is a “false meme”. “False meme”, what the heck does that mean? We assume he is implying that certain market participants are spreading false information about the HFT’s. That seems like it would be pretty hard to do especially since the HFT industry has enough money to hire powerful lobbyists as well as sponsor pro-HFT academic studies. We find it hard to believe that Dr. Jim does not believe that certain market participants are seeing orders before others. Why then would HFT’s spend all that money on co-location services and data feeds? And if you remember the example in yesterday’s morning note, it is pretty obvious that HFT’s see orders before traditional investors. Their entire business model is based on this premise. Why then would Dr. Jim make such a statement? Is he trying to persuade regulators that HFT is not bad and “there is nothing to see here”? Is he using his academic influence to favor a certain set of market participants?
For those of you who saw “Inside Job”, Rick Mishkin also had some similar conflicts about the financial stability of Iceland. Watch Mishkin video clip here Apparently, he got paid by the Icelandic Chamber of Commerce to write a paper about the stability of Iceland’s banks and to assure investors that there was “nothing to see here”. We wonder if the same thing is going on here.