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The Market's New Motto: Speed Kills

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As social mood turns negative, all things "high-frequency" come under fire.

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It's doubtful many of us had ever heard of "high-frequency trading" before this year, but to judge by the digital ink being pushed out by financial media, it's among the single-most important issues facing financial markets these days. Hundreds of news articles about high-frequency trading have appeared in the media over the past month alone, almost all of them taking a dim view of a practice few had bothered to notice. So why now?

If we take media sources at face value, the sudden focus on high-frequency trading is almost solely based on one thing: performance. High-frequency trading enjoyed a spectacular year in 2008 while hedge funds overall had a record-setting disastrous one.

Then, there's also the volume. During bear markets liquidity dries up, so high-frequency trading has naturally overtaken a larger percentage of market volume. High-frequency trading now accounts for more than half of stock-trading volume in the US, and some suggest as much as three-quarters.

Is that it? Performance and volume? Not hardly. In order to understand why high-frequency trading is on the mainstream radar today we have to understand the social paradigm at work, for most certainly there is one, and unsurprisingly, it's closely tied to a shift in social mood.

But let's back up for a moment. What is high-frequency trading? Essentially, it's precisely what the name implies: trades executed at superfast speeds. The fact these trades are accomplished by high-speed supercomputers tends to obscure the wizard behind the curtain, so to speak. After all, the computers are simply doing what they're told.

The arguments against high-frequency trading are interesting, if only from a socioeconomic standpoint, despite the fact that high-frequency trading has been around for years. Even in 2006, high-frequency trading accounted for more than 25% of market volume. Of course, few cared in 2006 because hey, everything's funny when you're making money. In fact, evidence pointing the other way is that high-frequency trading makes markets more efficient and stable by providing liquidity.

So again, why now? Well, if we consider the move to attack high-frequency trading within the context of the same social-mood wave attacking all things hyperfast and hyperbolic, the social dynamics begin to get more clear. During waves of positive trending, social-mood speed is favored over consideration, high-frequency over deliberations. Everything revolves around increasing speed; productivity, working harder, faster, longer.

This is true in all facets of communication and exchange. After all, what's really being exchanged in high-frequency trading is information. Of course, that information is valued at a higher level than, say, my twitter feed, which itself is a form of high-frequency exchange, but the social paradigm is identical. The unconscious herding impulses that led us to pursue faster ways to communicate were precisely what created the conditions necessary to pursue technologies enabling increasing speed and frequency of exchange in all things. In short, we thought speed was the answer to all our problems.

Now, the worm has turned. These same unconscious herding impulses are telling us that, as it turns out, speed is more often our enemy than our ally. From an Austrian economics perspective this is also very much relevant to how we choose time preferences in our decision-making, which is the basis for all decisions and transactions.

What this means is that we should expect to see increasing attacks on high-frequency exchange across multiple disciplinary frameworks: film, writing, fashion, media. The operative phrase going forward will be "speed kills."
No positions in stocks mentioned.

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