Three Expensive Milliseconds

Written on April 16th, 2014 in politics Comments Off

Published on NYTimes, by Paul Krugman, April 13, 2014.

Four years ago Chris Christie, the governor of New Jersey, abruptly canceled America’s biggest and arguably most important infrastructure project, a desperately needed new rail tunnel under the Hudson River. Count me among those who blame his presidential ambitions, and believe that he was trying to curry favor with the government- and public-transit-hating Republican base.  

Even as one tunnel was being canceled, however, another was nearing completion, as Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was not, however, intended to carry passengers, or even freight; it was for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.

Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book “Flash Boys,” a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.

Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.

How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year … //

… (full text).

Links:

European Union vows to get tough on high frequency trading HTF, on The Independent.co.uk, by , April 14, 2014: Europe’s financial chief has vowed to lead the toughest ever clampdown on “flash boy” high-frequency traders as the world’s biggest futures market faced legal action related to the practice …;
(my comment: this and Official EU’s behavior in the Ukrainian mess shows clearly: our REAL EU ELITES find definitively their salvation in the actual financial sector – AGAINST us, “their” people … they rather ruin us all than miss one nub of influence, powerplay and blackmailing on our politic puppets).

again: A simple proposal to kill high frequency trading (HFT) in the stock market, on Real-World Economics Review Blog, by Trond Andresen, April 11, 2014;

Remarks by Chairman Alan Greenspan: Risk Transfer and Financial Stability – To the Federal Reserve Bank of Chicago’s Forty-first Annual Conference on Bank Structure, Chicago, Illinois (via satellite), published on The Federal Reserve Board, May 5, 2005;

The Private and Social Value of Information and the Reward to Inventive Activity, on DUKE.edu, by Jack Hirshleifer, 19/04/2008, 15 pdf-pages; (stable URL on JSTOR.org);

High-Frequency Trade HFT:

  • on Google Scholar-search;
  • on Google News-search;
  • on en.wikipedia is a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities.[1][2][3][4] HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.[5][6] Firms such as British-based Algorates, one of the first to employ HFT, rely on advanced computer systems and the processing speed of their trades to record high earnings in the market[7][8] …;
    inclusive:
    /May 6, 2010 Flash Crash;
    (see also main article: 2010 Flash Crash also known as The Crash of 2:45, the 2010 Flash Crash, or simply the Flash Crash, was a United States stock market crash on Thursday May 6, 2010 in which the Dow Jones Industrial Average plunged about 1000 points (about 9%) only to recover those losses within minutes.[2] It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history …);
    /See also;
    /External links.

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