CNBC: [Michael] Lewis maintains that
high frequency traders are front running smaller investors in his words,
legal front running is how he puts it.
Cuban: Yeah, they are. I mean, there's no
question about it. You
know, they know if you go to the store every day to
get a snickers bar, well, if I run to the store first, get a little bit of
a discount and sell you your snickers bar, you know,
they're going to make a little bit of money. Especially if they do
it millions of times. It's almost like taking advantage of
a regulation that's not quite right. It's what they do, and they've been
doing it for a long time. And it's reality. But I don't think
that's even the greatest risk of high frequency trading. That's just part
of the deal.
CNBC: What is the greatest risk then?
Cuban: The greatest risk is that, A)
there's no such thing as bug-free software. All this is
software-driven. It's actually even going to
processor driven. And
because of -- because there's no such thing as
bug-free software, when you have fat finger bugs, you don't know what's going to happen to the market.
So there are structural risks, trading risks, and I think that plus
the fact that when you have algorithms trying to
figure out routes and how to get ahead of
orders. It's not like
there's just one player jumping in front of all
these orders. You've got
all these different algorithm traders, it's not
about small investor or any investor giving up some amount of
money to somebody who jumped in front of them, the
risk is all these different high frequency traders playing a game with
their algorithms to get in front and make
that trade. Because we
don't know they factor in all the ways they may
interact and the negative consequences that occur as a result, that introduces a market risk. That market risk has an
unquantifiable cost. We saw it in one instance with the
flash crash. We see it every day with little
mini-flash crashes. We've seen some -- it's gotten a little bit better with the circuit
breakers per stock, but we just don't know.
And that's even without the possibility of a malicious algorithm being intentionally introduced into the mix.
There are
so many things that can go wrong as all the
different high frequency traders jockey to get in front of that order. That to me is the biggest
problem. I think as a
result you'll see people not staying with their
positions as long because they're not quite sure what's going
to happen with the market. When you see something
start to go bad in the market, they don't
trust the system to say, you know what, somebody will jump in there and pick up the trades. For
all they know the chair might be pulled out and the
whole market could fall even further. And then we have such
strong correlations between different markets and different types of equities and financial devices that
even though there are circuit breakers involved,
one trade down, limit down, might lead to something happening in another, might lead to something happening in another equity might
lead to something happening in a full market and
who knows how far down that can cascade. All those things introduce
risk. All those things take a lot of money to try to understand and combat. Because of that that's a
cost...
~ Mark Cuban, as appeared on CNBC, March 31, 2014
No comments:
Post a Comment