Tuesday, February 28, 2012

Weird stuff in high frequency markets

John Cochrane (of U. Chicago) has a really interesting post on some strange behavior that has been documented in high frequency trading environments.   It seems as though some of these phenomena are driven by the interaction of multiple execution algorithms.

A great quote:
High frequency trading presents a lot of interesting puzzles. The Booth faculty lunchroom has hosted some interesting discussions: "what possible social use is it to have price discovery in a microsecond instead of a millisecond?" "I don't know, but there's a theorem that says if it's profitable it's socially beneficial." "Not if there are externalities" "Ok, where's the externality?" At which point we all agree we don't know what the heck is going on.

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