The development of the news coverage of high-frequency trading has been quite interesting. The story
started out with a criminal complaint that
Goldman Sachs (NYSE:
) lodged against Sergey Aleynikov, a former employee who allegedly stole some secret computer code from the Goldman network before departing for a new job in Chicago. Incidentally, Mr. Aleynikov appeared
to be headed to Teza Technologies, a company recently started by Mikhail Malyshev, who had previously been in charge of high frequency and algorithmic trading at Citadel, a Chicago-based hybrid fund. Immediately after the report leaked,
Citadel (NYSE:
) began investigating Mr. Malyshev’s departure and filed a lawsuit to prevent him from getting his nascent business off the ground. From these facts, some reporters inferred that the surprisingly public maneuvers of two notoriously secretive finance giants vis-à-vis seemingly routine personnel matters showed that Aleynikov had tapped into the gold mine of precious proprietary trading software.
That was two weeks ago. At this point, the story has crescendoed. The New York Times (NYSE:
) ran a report on high frequency trading. The Economist published a piece on the same topic. Senator Schumer (D-NY) requested that the SEC investigate the matter and the agency acquiesced.
The cynical perspective on these events is that both Schumer’s and Mary Schapiro’s moves with respect to algorithmic trading show that the issue is a red herring. As the argument goes, neither of these actors would touch the practice if it actually underpinned Goldman’s record profits or Citadel’s outstanding performance in 2004-2006. If, however, banning the practice would eliminate a few small hedge funds and create the appearance of revising market frameworks without threatening the big players (a regulatory brush fire of sorts), high-frequency trading would form the perfect political target.
However, I am not that cynical. I am friends with a few traders (yes, I know, I am tainted), and conversations with these guys always prove pretty interesting. At this point, the securities infrastructure is completely dependent on and permeated by high-speed computers carrying out various tasks. Some of these tasks are clearly benevolent and straightforward – matching buy orders with sell orders, reporting pricing – while others are probably benevolent but too opaque for us to be certain – concealing large orders by splitting them into chunks. Of course, certain practices made possible by advanced technology appear downright abusive.
To reliably distinguish the bad strategies from the good ones, regulators must have a clear idea of whom they work to protect.
