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The Technology Investor: "Indispensable" HFT Mitigates Risk

In a piece for Casey Research’s The Technology Investor, senior editor Doug Hornig zeroes in on some of Flash Boys author Michael Lewis’ most questionable claims about HFT. He also settles the score about HFT’s role in the flash crash of 2010, seeks to settle misplaced fears about HFT, the role it plays and whether or not the markets are “rigged.”

In discussing what actually causes major market disasters – and HFT’s true role – he writes:

Well, consider this: Market disasters generally result from risk that exceeds supportable levels. The collapse of ‘08 was triggered by the trading and re-trading of mortgage-backed securities that couldn’t be accurately valued. With each trade, the risk was magnified some more, until it finally overwhelmed the system. Or take the dot-com crash, which came about because the price of revenue-free startup companies was bid so high that the risk of continuing to hold them blew way past the probability of selling to the next sucker in line.

HFT, on the other hand, is about the exact opposite—mitigating risk.

And on the flash crash:

As a market stabilizer, proponents say, HFT has become indispensable. They point to the infamous Flash Crash of ‘10, which took the Dow down nearly 1,000 points in 20 minutes.

 The trigger for that was a simple human error. HFT quickly re-priced securities and stair-stepped them back up to their proper levels, it is argued, thereby reversing the crash before it could spin entirely out of control.

Hornig’s piece is a frank look at recent HFT criticisms combined with an easy-to-understand translation of what actually occurs in the markets. Through his piece he shows how HFT benefits investors, today’s modern markets and establishes that it is not something to fear.

Check out more of the best lines from his piece, “How I Learned to Stop Worrying and Love High-Frequency Trading” here.