Quote from cosine:
'Same team' meaning... ? OTC product risk sounds pretty far away from HFT system design to me. In what kind of bank is that done 'in the same team' ? One is middle office, the other is front office, one is risk, the other is programming, one is custom made products, the other is exchange traded. Skill sets are not even close to be similar. So how exactly does your experience as an OTC products risk manager entitle you to say that high frequency trading is a fad?
First I was not a risk manager.
Second the team I was part of was drum roll.... CUSTOM PROGRAMMING!!!
You see the way that the teams were split up were according to business on one side and software on the other side. And in the software it was split up in products. And I guess since you are from one of those environments you can probably understand that there are a whole host of products, like Front Arena, Lighthouse, etc, etc... Because this was the software side of things they thought it would be better to keep Front Arena with Front Arena even though they might cross business boundaries...
So guess what, being in custom programming we were an odd lot of various skills...
Next time don't presume to know something that you don't know about, ok?
Quote from cosine:
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Here's some news for you buddy: everything in an investment bank is an arms race, and investment banks always invest more and more in business segments until the marginal profit is driven to zero. In fact, all businesses do that. Revise your econ 101.
There is more to investment banking other than computers. There are a whole host of things that big investment banks do, that do not require an arms race. For example, wealth management is not an arms race. Or how about M&A, Equity Underwriting, or Debt underwriting... Not an arms race either since it is just a bunch of quants sitting down thinking how things can be structured.
Quote from cosine:
Banks will invest in infrastructure to provide cheaper liquidity and faster price discovery to long term investors, triggering technological innovation, amortizing the cost of high-end computer systems and network infrastructure. They will do so until, it is true, the marginal profit of doing so converges to zero. Yet this is far from meaning that the total profit generated by HFT will converge to zero. The total profit will be *maximized*, and as with any maximum, the first derivative is... zero.
Again, this is only one part of the business. You need to read the following book:
"The Business of Investment Banking" from Amazon...
This book gives you are really overview of what investment banks do.
Quote from cosine:
Meanwhile, long term investors will be able to trade higher volumes in response to new information affecting the value of securities, resulting in more efficient markets in the long run. Capital will be allocated more efficiently across firms and governments. You'll pay less taxes, and your hamburger at McDonalds will be cheaper. That's not a fad.
A fad is creating a limited liability entity that will buy already traded liabilities and repackage them as new liabilities and hopefully sell them with a spread over the original liabilities in order to pay lawyers, accountants, managers, bankers, sales people and, of course, risk managers (who quite frankly did not prove to be much useful), in the process. Now we're talking fad.
Now that is a stretch if I ever saw one. First do long term investors want to trade in higher volumes? They already have it with dark pools since that was the original reason of dark pools. High frequency trading for a long term investor adds very little since the long term investor does not care if they got a stock at 3% higher or lower.
What you are talking about is the trader. The trader is directly affected by high frequency trading since 3% at the bottom and 3% at the top can make quite a difference.
A fad as defined by dictionary.com:
a temporary fashion, notion, manner of conduct, etc., esp. one followed enthusiastically by a group.
And considering how rabid you are on this thread, I made my case and high frequency trading is a fad. High Frequency trading works because the odds are unevenly stacked. Some are getting lots and lots chips, whereas others are not. But that will change with time to the point where it will not be interesting anymore.
