Friday, June 14, 2013

High Frequency Trading

An exchange between Kevin Drum, Felix Salmon, and Karl Smith illuminates how it is possible for a group to extract rents by making the costs so diffuse that there is no clearly identifiable victim.  Karl Smith says it best:
Each time pro traders with proprietary information load up on one side of a trade they nick ever-so-slightly the return to the average Joe. Year-after-year it adds up to an environment where the average retail return is going to be lower than the average pro return. And, since the stock market is likely the best long term investment available to the average Joe, the average Joe’s best chance at financial success is diminished.
I think this conversation is a great example of how something marketed as providing a service (i.e. liquidity) can actually also be a way to extract rents from the market. 

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