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Drag Racing in Finance

August 17, 2012 | About:

ryzamora

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In the first week of August, Wired published online an article that commented on the trading losses incurred by Knight Capital. The editor noted that the "most interesting thing" about the fiasco was how it took less than an hour for a "bulk of the bad trades" to hit.

Here's the jump: Wall Street used to bet on companies that build things. Now it bets on technologies that make faster and faster trades.

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Clearly the proliferation of light-speed quant traders will raise market efficiency to the extent they are likely to reflect all confirmed information almost immediately at the time of publishing. When I say "confirmed information," I am referring to events that happen on the spot, even if they are visible weeks or months in advance. The fact these quants are already operating on swift platforms — fast enough for one company to capture 1.5% of average daily volume in U.S. exchanges and for the article to remark that quants as a group generate "as much as 55 percent of all U.S. stock trading" — highlights not the observed retreat of human beings who decide on subjective appraisals but the increasing importance of (i) reliable sources of information spanning from multiple walks of life, (ii) a systematic analytical process established on common sense and practicality rather than academic theory, (iii) a cynical approach to scrutinizing human behavior, and above all, (iv) emotional restraint.

The quants' obsession for speed and minimization of latency is turning them into financial drag racers who bank on the vacuum world of mathematics and mistake economics as an absolute science (much like physics, chemistry and other sciences of the natural world) when it suffers from collectivism and the inability to factor in the unpredictability and diversity of human beings. Naturally, the more money these people make, the more arrogant and careless they become. I'd even say elitist, but the article's "distinctive mixture of diffidence and arrogance" is more appropriate.

Financial drag racing and the impact of success on the human ego ramify into the potential to provide wonderful opportunities for those of us who act on the basis of the long term, who acknowledge the reality that we live in a world that moves alongside our every move and is unwilling to wait for the weak, the slow, and the hesitant, and who, above all, realize our world does not operate around money alone.

About the author:

ryzamora
Ry Zamora is a value investor with a 2010 Bachelor's degree in Mgt from the Ateneo de Manila University in the Philippines. He started his investment portfolio in his junior year and, showing much love for money management, exhibited a strong willingness to learn and continues to find thrill in making money.

Rating: 4.5/5 (2 votes)

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