Streetwise Professor

October 18, 2012

High Frequency Scapegoating

Filed under: Economics,Exchanges — The Professor @ 7:50 pm

As soon as I heard about Google tanking 10 percent, leading to a trading halt, in response to a prematurely released earnings announcement, I asked myself: “I wonder how long before someone blames HFT.”  I didn’t have to wait long.  Almost immediately afterwards, Jim Cramer (gag) and Harvey Pitt were on CNBC putting the blame on computerized trading.

Let me get this straight.  Extremely bearish information about GOOG is released.  GOOG immediately tanks.  Trading in the stock is paused.  On resumption of trade, the stock trades a little off its lows, but 8 percent below the pre-information level.

Uhm, isn’t that the way efficient markets are supposed to work?  Aren’t prices supposed to drop immediately upon the release of bad news, and stay down (absent any offsetting good news)?   Didn’t this happen before HFT?  Like forever?

So what’s your problem, Cramer?  (I’m talking about the market, not you personally-I don’t have enough time to even begin with your issues.)  Are you just ticked that the price doesn’t move down slowly, giving turkeys like you a chance to make money at the expense of even slower turkeys?

I often quote Captain Renault (Claude Rains) from Casablanca to describe how any price move in commodities is pinned on “speculators”: “Round up the usual suspects.”  When it comes to any big move in the stock market, the only thing that has to be changed is to substitute the singular for the plural: “Round up the usual suspect.”  Because its always about HFT/algos.  High frequency scapegoating.

Google was PO’d at the premature release of the earnings numbers by RR Donnelly.  The main reason it was PO’d is that the premature release prevented it from spinning the awful news.  When it did have the opportunity, Larry Page delivered one of the most mendacious statements imaginable:

“We had a strong quarter,” Page’s statement said. “Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter. I am also really excited about the progress we’re making creating a beautifully simple, intuitive Google experience across all devices.”

“I’m really happy with our business…Not bad for a teenager,” Page added on the earnings call.

Who you gonna believe, Larry or the lyin’ market?

Do no evil.  More Orwellian by the day.

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1 Comment »

  1. With profits harder to come by – at least momentarily – it won’t be surprising to see HFTs increasingly looking to deploy their strategies beyond equities. University of Houston professor Craig Pirrong says they’re already beginning to stir the pot in the natural-gas futures markets.

    In a piece for CME Group, Pirrong says fierce HFT competition has narrowed spreads to virtually nothing in equities, so traders are looking for markets with fatter margins, which makes the commodities markets attractive. As a result, Pirrong predicts that spreads in natural gas, and commodities in general, will narrow as HFTs increasingly pour their technology and capital into those markets… 🙂

    Professor, I totally agree. I actually am looking forward to it – and that for quite some time.

    Comment by MJ — October 20, 2012 @ 12:51 am

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