Coyote Blog

My guess is that HFT will soon become one of those bogeyman words that people automatically associate with "bad stuff" without ever actually understanding what it means.  But it is worth understanding the underlying problem, and that problem is not high speed or frequency per se.

As I understand it, when an order to buy, say, 10,000 shares of Exxon gets placed, the purchase will get pieced together by searching across multiple servers where offers are listed and putting together the 10,000 shares in bits and pieces from these various servers.  What HFT's are doing (and I am sure this is grossly oversimplified) is that once it sees this order pinging  a server, it runs ahead at high speed to other servers and buys up blocks of Exxon at price A and then offers it up to the pokey buying search when it finally arrives at those servers at A+a bit more.  That "a bit more" may be less than a penny, but the pennies add up and if done right, there is almost no trading risk.

This is bad, though generally not for us small investors but for our mutual fund companies.  For my little trade of 100 shares that might be cleared on the first server, HFT's have no opportunity to play.  Moreover, I may not even notice a penny or two difference in the price I get.  This is a much bigger deal for mutual fund companies and large investors clearing larger trades, where a few pennies can add up to a lot of money.

An exchange always has to be really careful to maintain its image of fairness, and systematically allowing such behavior, called front-running, is not good for the health of the market.   Which is why you are hearing a lot about this.

Here is what you are not hearing, and I will admit that it is all a hypothesis of mine.  But it may well be possible that HFT's actually reduce the total cost of front-running to investors.  It may be that HFT's real crime is that what they are doing is more transparent and visible than what market makers were doing in the past -- ie they are not increasing the volume of front-running, they are just making it more obvious.   I would not be at all surprised if such front-running always existed in market-making (certainly Goldman Sachs has been accused of it) and that HFT's are actually the Wal-Mart or Amazon of front-running -- not doing anything new but doing it cheaper on tighter margins.   Kind of ironically, I suppose this is what efficient markets theory would predict for the market in front-running.

If this is the case, while we would rather see front-running eliminated entirely, HFT's may actually be reducing the cost of front-running and making things more rather than less efficient.

This correction by Michel Taylor of something called the Australian Independent Media Network has got to be the longest correction in history.  You know it is an incredible correction when this is just a tiny part of the errors admitted:

• Evans does not believe, and has never believed, that 9/11 was an inside job perpetrated by the Rothschild family, that US President Barack Obama is a secret Jew, that the Holocaust never happened or that Jewish bankers and the Rothschild family have assassinated at least two US Presidents.

The author also admits to getting Evans' education, occupation, organization, and sources of funding wrong.

In part I suppose kudos are owed to Mr. Taylor for being so honest, but seriously, how can one be so comprehensively wrong? (I will actually explain why in a minute).  The correction runs on so long in part because he Taylor also has to correct an earlier correction where he blamed one of his original sources for being intentionally misleading.  He also apologizes for that.

I would likely have posted this anyway just because it is sort of funny.  But it just so happens to tie into what I wrote yesterday here.  Because it is clear that Mr. Taylor's core mistake is that he researched the positions of a climate skeptic (Mr. Evans) solely by asking climate alarmists (and climate alarmist web sites) what this skeptic believed.  He felt no need to hear the skeptic case from the skeptic himself.  And what do you know, the descriptions of Mr. Evans' beliefs as portrayed by his ideological enemies were full of errors, exaggerations, straw men, and outright lies.  Who would have thought?

We can laugh at Mr. Taylor, but at least he admitted his mistakes in great depth.  But outlets such as the LA Times and the BBC have recently made it a rule they will never allow skeptic voices into their reporting.  They have institutionalized Mr. Taylor's mistake.

The OK Cupid website is protesting the Mozilla CEO's past donations to anti-gay-marriage campaigns by asking visitors to use something other than Firefox to browse their site.  Readers will know that I have actually led a past Equal Marriage effort in Arizona, so while sympathetic to the cause here, I don't think I would go so far as to block a browser to my website.  Establishing this precedent that I would boycott services and products based on the political views of company employees (which is the issue here, Mozilla does not have any official position on gay marriage that I know of), I could consume my whole life doing research.  And then I would be stuck with questions like "Are the gay marriage opinions of the Firefox CEO better or worse than Google/Chrome's enabling of censorship in China?  As I have told some folks before, if I really wanted to do do business only with those who agree with me politically, I would find myself stuck for life listening to a couple of Rush albums and watching Firefly and Wire reruns all day.

But anyway, OK Cupid is a private company and I presume they do this with their owner's approval so all's fair in conducting commerce or choosing not to conduct commerce.  Except that just a few weeks ago everyone was arguing that photographers should be forced to serve gay weddings even when they do not wish to do so.  Is this any different?  If we are going to establish a public accommodation standard that a business cannot turn away customers based on political or religious preferences, then don't we have to enforce that in a value-neutral way?

From James Delingpole:

The draft version of the report's Summary For Policymakers made the startling admission that the economic damage caused by "climate change" would be between 0.2 and 2 percent of global GDP - significantly less than the doomsday predictions made in the 2006 Stern report (which estimated the damage at between 5 and 20 percent of global GDP).

But this reduced estimate did not suit the alarmist narrative of several of the government delegations at the recent IPCC talks in Yokahama, Japan. Among them was the British one, comprising several members of the deep green Department of Energy and Climate Change (DECC), which insisted on doctoring this section of the Summary For Policymakers in order to exaggerate the potential for more serious economic damage.

"Losses are more likely than not to be greater, rather than smaller, than this range (limited evidence, high agreement)"

There was no evidence whatsoever in the body of the report to justify this statement.

I find it fascinating that there can be "high agreement" to a statement for which there is limited or no evidence.  Fortunately these are all self-proclaimed defenders of science or I might think this was purely a political statement.

Note that the most recent IPCC reports and new published studies on climate sensitivity tend to say that 1) warming in the next century will be 1-2C, not the much higher numbers previously forecast; 2)  That warming will not be particularly expensive to manage and mitigate and 3) we are increasingly less sure that warming is causing all sorts of negative knock-on effects like more hurricanes.  In other words, opinion is shifting to where science-based skeptics have been all along (since 2007 in my case).  No surprise or shame here.  What is shameful though is that as evidence points more and more to the lukewarmer skeptic position, we are still called evil heretical deniers that should be locked in jail.  Like telling Galileo, "you were right about that whole heliocentric thing but we still think you are evil for suggesting it."

Yesterday I was interviewed for a student radio show, I believe from the USC Annenberg school.  I have no quarrel with the staff I worked with, they were all friendly and intelligent.

What depressed me though, as I went through my usual bullet points describing the "lukewarmer" position that is increasingly common among skeptics, was that most of what I said seemed to be new to the interviewer.   It was amazing to see that someone presumably well-exposed to the climate debate would actually not have any real idea what one of the two positions really entailed (see here and here for what I outlined).  This gets me back to the notion I wrote about a while ago about people relying on their allies to tell them everything they need to know about their opponent's position, without ever actually listening to the opponents.

This topic comes up in the blogosphere from time to time, often framed as being able to pass an ideological Touring test.  Can, say, a Republican write a defense of the minimum wage that a reader of the Daily Kos would accept, or will it just come out sounding like a straw man?  I feel like I could do it pretty well, despite being a libertarian opposed to the minimum wage.  For example:

There is a substantial power imbalance between minimum wage workers and employers, such that employers are able to pay such workers far less than their labor is worth, and far less than they would be willing to pay if they had to.  The minimum wage corrects this power imbalance and prevents employers from unfairly exploiting this power imbalance.  It forces employers to pay employees something closer to a living wage, though at $7.25 an hour the minimum wage is still too low to be humane and needs to be raised.  When companies pay below a living wage, they not only exploit workers but taxpayers as well, since they are accepting a form of corporate welfare when taxpayers (through food stamps and Medicare and the like) help sustain their underpaid workers.

Opponents of the minimum wage will sometimes argue that higher minimum wages reduce employment.  However, since in most cases employers of low-skilled workers are paying workers less than they are willing and able to pay, raising the minimum wage has little effect on employment.  Studies of the fast food industry by Card and Walker demonstrated that raising the minimum wage had little effect on employment levels.  And any loss of employment from higher minimum wages would be more than offset by the Keynesian stimulative effect to the economy as a whole of increasing wages among lower income workers, who tend to consume nearly 100% of incremental income.

Despite the fact that I disagree with this position, I feel I understand it pretty well -- far better, I would say, than most global warming alarmists or even media members bother to try to understand the skeptic position.  (I must say that looking back over my argument, it strikes me as more cogent and persuasive than most of the stuff on Daily Kos, so to pass a true Turing test I might have to make it a bit more incoherent).

Back in my consulting days at McKinsey & Company, we had this tradition (in hindsight I would call it almost an affectation) of giving interviewees business cases** to discuss and solve in our job interviews.  If I were running a news outlet, I would require interviewees to take an ideological Touring test - take an issue and give me the argument for each side in the way that each side would present it.

This, by the way, is probably why Paul Krugman is my least favorite person in journalism.  He knows very well that his opponents have a fairly thoughtful and (to them) well intention-ed argument but pretends to his readers that no such position exists.  Which is ironic because in some sense Krugman started the dialog on ideological Turing tests, arguing that liberals can do it easily for conservative positions but conservatives fail at it for liberal positions.

** Want an example?  Many of these cases were just strategic choices in some of our consulting work.  But some were more generic, meant to test how one might break down and attack a problem.  One I used from time to time was, "what is the size of the window glass market in Mexico?"  Most applicants were ready for this kind of BS, but I do treasure the look on a few faces of students who had not been warned about such questions.  The point of course was to think it through out loud, ie "well there are different sectors, like buildings and autos.  Each would have both a new and replacement market. Within buildings there is residential and commercial.  Taking one of these, the new residential market would be driven by new home construction times some factor representing windows per house.  One might need to understand if Mexican houses used pre-manufactured windows or constructed them from components on the building site."  etc. etc.