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High-Frequency Trading Is Bad For Profits, Including Those Of High-Speed Traders: Study

High-Speed Trading Bad For Everybody: Study
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Managing Editor, Business and Tech, The Huffington Post

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High-frequency trading is bad for everybody, including high-frequency traders, according to new research from a university that produces economic reports that are sold early to high-frequency traders.

Congratulations, world, these are your modern financial markets. The study, by the University of Michigan's engineering department, focuses on one particular tactic of high-speed trading, known as "latency arbitrage."

This is the practice of gaming the split-second lags between the time trades are made and the time those trades are crunched by a central clearing house called the Security Information Processor into a price quote called the National Best Bid And Offer. Traders with super-fast computers can calculate the NBBO faster than the Security Information Processor can do it, and they take advantage of the tiny gaps between the old NBBO and the new NBBO.

The researchers say this trade somehow reduces the total amount of profits in the system -- in other words, it not only hurts regular, slowpoke investors, but also other high-speed traders. Whatever profit each individual robot makes on a latency arbitrage trade is less than the amount of profit that is destroyed by the practice, according to the report. This is just more evidence that zapping thousands of trades per second does nothing for society.

High-speed trading's defenders, including academics whose research is bankrolled by high-speed trading firms, claim that this sort of foolishness improves market function and makes trading cheaper for everybody, which gives investors more money to spend on puppies and charity and whatnot.

But the University of Michigan researchers, who were paid by grants from the National Science Foundation, say the latency arbitrage trading they studied actually hurts market efficiency by widening the spread between the prices that buyers will pay and the prices that sellers will accept.

Ironically, the University of Michigan has recently been involved in a scandal-like brouhaha involving high-speed trading. The university produces a monthly consumer-sentiment index that it sells to Thomson Reuters for $1 million per year. For a fee, Reuters gives traders a look at these sentiment numbers five minutes before the rest of the suckers on Wall Street see it. For an even bigger fee, high-speed traders can get the numbers five minutes and two seconds before everybody else, giving them time to make high-speed trades on the numbers.

The university told CNBC that it thought the arrangement didn't violate any regulations and that it could not produce the sentiment index without the money it gets from Reuters. Reuters said it has always made these arrangements public knowledge.

It's not clear just how much money high-speed traders can make on sneak peeks at consumer-sentiment data, or on latency arbitrage or other shenanigans. Obviously trading firms think there is gold in them thar milliseconds, as they have been steadily ramping up their efforts to trade ever faster, using lasers and microwaves.

Still, there are signs that the growth of high-speed trading has stalled, Bloomberg Businessweek noted earlier this month, with trading volume and profits falling. Maybe traders are figuring out they're mainly taking from themselves.

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Before You Go

10 Jobs That Won’t Be Taken By Robots, Yet
10. Politics(01 of10)
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Predictions about our robot overlords aside, we will probably never have a robot in the White House. "I think a lot of government jobs may someday be threatened, but probably not those of politicians," says Ford. A robotic president would require human-like artificial intelligence of a kind that experts may never be able to develop, he points out. And even if they could, the people who kiss babies, give speeches, and make laws for a living will probably retain their gigs.

"The best answer for why we won't have robotic politicians is that the politicians would never allow it," says Ford. "Among workers, politicians really have a unique level of power when it comes to protecting their own interests." However, their support staff--government-paid analysts, auditors, and accountants--won't necessarily be as safe since much of all of the work they do could be automated some day. (credit:AP)
9. Lawyers, Financial Analysts, Creative Knowledge Workers(02 of10)
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Creative knowledge workers--those who have to think creatively for a living--aren't going to be phased any time soon, either. Take lawyers, for instance. "Much of the core work involves value judgment: what is good, what is bad what is desirable or not," says Subramani, who points to the opinions judges write as an example. "It's more than just logical reasoning based on evidence." Other creative knowledge workers include architects and financial analysts. But those doing non-creative knowledge work, like paralegals who search for and gather data won't fare so well. "Doing anything that involves consistently executing a rote task--is likely to be where robots are likely to excel," Subramini adds. (credit:AP)
8. Media(03 of10)
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Though content-stripping bots can already cut and assemble simple news stories, and "content farms" are spreading like pop-up stores, writers, editor, and designers are likely to be needed well into the future to help keep the Internet running. "Yes, there are very good 'off-the-shelf' programs like WordPress to 'automate' how a website gets published," Kantor notes. "But we need lots of real people to input data, design pages, and write and edit material so that people actually want to read it." Television channels and magazines will also continue to need to employ people for similar reasons--not just to report on stories, but to design graphics, manage editorial and production teams, and so on. (credit:AP)
7. Human Care(04 of10)
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Robots won't advance that quickly in industries where a human touch is preferable, even if it isn't entirely necessary, as Subramani points out; in situations where interacting with a machine might be upsetting instead of soothing, humans won't be pushed out. "For instance, I find it hard to believe that we will have funeral home employees replaced by robots, even though robots may be more efficient," Subramani says. "I think industries like daycare are reasonably immune for the same reasons." (credit:AP)
6. Most Health Care(05 of10)
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If you're a doctor, nurse, or physical therapist--working in a healthcare job that requires a lot of direct interaction with patients--there's probably no need to be looking over your shoulder for a machine version of yourself, says Ford. All the same, he cautions, "there are certainly a lot of areas where automation is developing--like hospital delivery and pharmacy robots. The Japanese are even working on automating some nursing and elder-care functions." In fact, he adds, systems like IBM's Watson may even start making diagnoses some day. And radiology jobs--already off-shored to India much of the time, where doctors read scans at much lower cost--are also likely to be largely automated eventually. (credit:AP)
5. Environmental Think Tanks(06 of10)
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As the environmental problems brought on by global warming increase--and energy costs rise--more and more people will be needed to study and enact means by which businesses can reduce their carbon footprints. As Kantor points out, we'll need workers who can measure carbon use, devise strategies to lower it, and guide implementation of those plans. "Lots of people up and down the supply chain will be needed to make such initiatives work--to decide what data to collect and how to collect it, to analyze it, and to figure out which changes to make," she says. (credit:AP)
4. Primary And Secondary Education(07 of10)
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Since there's no "profit motive that drives efficiency" when it comes to teaching at the primary and secondary levels, these kinds of jobs aren't likely to be automated any time soon, as Ford notes. But college-level teaching? That might be endangered. "I think higher education will go increasingly online," says Ford; he notes that six recent experiments found that college students enrolled in courses with machine-guided tutoring software performed just as well as their counterparts in traditional classes. "A few high-profile teachers will lecture huge numbers of students, and there are new software applications that can automate grading," he says. (credit:AP)
3. Managing Automation (08 of10)
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Ironically, even robots needs managers. "Although there's increasing automation in manufacturing plants in the US, there is a huge--and growing--need for workers who can manage the automation," says Kantor. "The industry requires people who understand welding, for example, and can also calibrate, maintain, and run the computers that might be doing the welding." (credit:AP)
2. Help Desks(09 of10)
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There is a trend to move help desks--for banks, software companies, and online stores, for instance--back into the U.S., especially in the southeast, where jobs are scarce, according to Kantor. "Increasingly, help desks are 'on-shoring,'" she says, pointing out that Microsoft now has help centers all over the U.S, in places like North Dakota, Florida, and California. Why the move back? Thanks to the bad economy, hiring U.S. workers is less expensive than it used to be. What's more, as Kantor notes, language and cultural barriers can make certain customers uncomfortable or impatient; many companies are betting that putting customers more at ease will be good for business. Could a help desk version of Siri be created? Sure, but it's not likely going to be sophisticated enough to handle all the issues that could come up. When software and hardware need a Sherlock instead of a Siri, a problem-solving human is better than a bot. (credit:AP)
1. Wind And Solar Power(10 of10)
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These industries will provide jobs for plumbers, electricians, and construction people, particularly whenever a new power plant or wind farm has to be built. Now sure, parts--like solar panels--are likely to be made by automation. "But they're hard to install by robot," says Tana Kantor, Publisher of The Green Economy, a magazine that covers eco-conscious companies and business practices. "Each installation is different, and there is no way to automate or mechanize the process." She adds, however, that while there will be plenty of work to be done in the development phase, not many people will be needed to maintain plants. (credit:AP)
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