Friday, January 7, 2011

Hsieh RCM OpEd: "A Defense of High-Frequency Trading"

The January 7, 2011 RealClearMarkets published my OpEd, "A Defense of High-Frequency Trading".

This piece is not directly about health care, but rather the critical economic infrastructure that makes health care innovation possible -- namely, efficient capital markets. I contrast the recent reporting in Wired vs. the New York Times on "flash trading" (high speed computer stock trading), and rebut three fallacious concerns raised by the NYT -- its supposed "unfairness", the loss of human control, and the difficulties it creates for government regulators.

Here is the opening:
Wired magazine and the New York Times both recently published detailed stories on "flash trading" -- the increasing use of high speed artificial intelligence algorithms in the financial markets. Both asked the same question: Will flash trading help the markets by improving efficiency -- or will it destroy them?

But while both stories covered the same basic facts, they took strikingly different approaches. Wired discussed the technology in a generally balanced fashion, whereas the New York Times adopted a more alarmist attitude, including emphasizing the problems the technology would create for government regulators.

However, the concerns raised by the Times against flash trading are variations of fallacies frequently raised against free markets. Hence, identifying and rebutting those fallacies will help one better appreciate and defend flash trading in particular, as well as market capitalism in general...
(Read the full text of "A Defense of High-Frequency Trading".)

I'd like to thank Wendy Milling for helping me get this published at RCM, and Ari Armstrong, Brian Schwartz, and Jimmy Wales for their helpful feedback on an earlier draft of this piece.