Andrew Haldane, one of the Bank of England's Executive Directors, illuminated the high frequency trading debate last week with this speech. It contains many gems such as this one:

"In some respects, this may sound like old news. For example, an evaporation of liquidity, amplified by algorithmic trading, lay at the heart of the 1987 stock market crash. And it is also well-known that stock prices exhibit non-normalities, with the distribution of asset price changes fatter-tailed and more persistent than implied by the efficient markets hypothesis at frequencies of years and months, perhaps weeks and days. But these abnormalities were thought to disappear at higher frequencies, such as hours and minutes. Over shorter intervals, efficient market pricing restored itself.

Recent studies point, however, to a changing pattern. Non-normal patterns in prices have begun to appear at much higher frequencies. A recent study by Smith (2010) suggests that, since around 2005, stock price returns have begun to exhibit fat-tailed persistence at 15 minute intervals. Given the timing, these non-normalities are attributed to the role of HFT in financial markets."

The implication is that price returns move more and more to their own frenetic, rhythm-less tune - not to that of any fundamental orchestra - and, given that prices have memory, may end up staining the landscape with additional fat-tail outcomes thereby creating new systemic risk.

Maybe - but it does so far more resemble a campus shooting spree by primates as likely to hurt themselves as genuine students. The goal of protecting those student ought alone to be enough to impose controls - without recourse to prodding awake the systemic bugbear.

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  1. Andrew Teasdale // 8/26/2011 08:46:00 PM

    Why are these people still stuck inside a general equilibrium framework trying to fit fat tails and non normalilities into their tool box of heuristics. After all, out of equilibrium, MPT is just that, a rule of thumb, an inefficient, irrationale, illogical frame.

    Andrew Teasdale

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