You’ve probably forgotten but at the end of November I wrote a post, a Flash in the Park. I’d like to continue the theme.
I met Alex last night, a self-confessed flasher. Let me set the scene. When I used to trundle off to work, most days, as a futures broker I became aware that the goal posts in the market had been adjusted. High frequency traders (Flash Boys, in Michael Lewis’s parlance) were programming computers to jump in and out of the market in nano-seconds. Does this inject liquidity into the market (good) or do these flash boys take a tiny crumb from every deal and make a shed load of money (wicked)? Alex, a fair-minded man, furrowed his brow and said, “gosh, I don’t know”.
When I was working I struggled to explain to my clients about these computer programmes which jump in ahead of their orders. It didn’t look to me as if these super-nerds were being much help. In the early days of high frequency trading the exchanges tried to discourage them by raising the fees for this ultra short term opportunism. Now it’s a different story.
Alex (not his real name of course) told me that 40% of the trades on the Chicago Mercantile Exchange are executed by the company he works for. His company, I’d guess, employs fewer than 100 people. That tail is really wagging the dog. Should the CME be worried? Of course not, they derive 40% of their income from his company.
It’s a mad, mad world and you should be aware of the inherent weakness in futures markets that could bite you in the bum like a rabid dog.
If you’d like this lesson served up with watercress and a wedge of lemon, pop out to the cinema and watch The Big Short.
You’ve got the point but let me underline it. If one of these flash trading programmes goes bonkers they will not be able to pony up to the exchange/clearing house what they owe. The hapless investors/hedgers on the winning side will not get their money. People will say that it’s never happened before and couldn’t be anticipated. Well, I’m anticipating. Actually, I wrote on the same subject from a different angle last year in a post, Too Big To Fail?
Should you be worried? Not really. But you might think that it’s advisable not to be exposed to banks that might get badly stung if this computer trading ever hits the buffers.
So who will play the part of the seer of Margravine Gardens in the film of the computer trading catastrophe. Brad Pitt took the equivalent retired trader in the Big Short but he is too micro biotic. Peter O’Toole may be hard to get hold of. Perhaps John Adams could set the whole disaster as an opera so the seer could be a fine bass?
Ps how do we make money from the impeding melt down that you predict?! Just joking.
Now where did I put my old piggy bank?