A bit more on the costs of high frequency trading

This is Saturday so I’m going to indulge a topic I find interesting plus we finally get to hear publicly from Tyler Durden at Zerohedge. I wrote the first post on this topic on Slabbed as part of an economic roundup post last month where I featured financial expert John Mauldin’s paper, Buddy, Can You Spare $5 Trillion?.  The post didn’t completely fall on deaf ears as our good friend from the insurance industry Sup recognized the importance of the topics covered.

Tyler Durden has been researching this topic since fall of last year and he has an interesting viewpoint which he blogged on back on the 2nd:

Taking the 6 billion daily average, and applying an average stock price of $20/share and using the assumption that HFTs represent 70% of the volume, while capturing 50% (and according to Zero Hedge sources, this number could be as high as 90%) of the 53 bps average IS spread in 2008 results in HFT slippage capture of over $220 million daily on NYSE stocks alone. And this does not even count rebates. Taking this one step further, assuming 250 trading days in a given year, brings the total annual costs to investors (and revenues to HFT strategies) to over $55 billion. If one expands this methodology to non-NYSE member stocks and exchanges, a reasonable guess for HFT tolls in the US alone to be over $100 billion.

One can see why HFT is a sacred cash cow for the limited group of participants who benefit from “providing liquidity.”

Recently, the market cap of U.S. listed stocks was just under $12 trillion: if the total annual cost to investors is indeed in the $100 billion ballpark, which they fork over to the likes of Goldman, RenTec and others for providing liquidity, it means that the liquidity premium of stock trading has increased to 0.8% of total assets.

Of course, arguments can be made that this is a fair price to pay in exchange for having daily liquidity available (although the debate of whether liquidity=volume is highly relevant) at our fingertips provided by thousands of computers which trade millions of shares every second. The bigger question is what is the potential for abuse of this highly under the cover P&L item, and have firms such as Goldman simply become a toll aggregator as a result of persistent stock churning and liquidity provisioning. As $100 billion is over 0.5% of the recently released GDP, does it not make sense to more actively evaluate whether the HFT market would benefit from some substantial anti-trust intervention, which in turn would promote higher competition and the break up of the highly profitable trading monopoly of a very select few?

Tyler has become so well respected in global finance circles Max Keiser allowed him on his internet show using his nom de guerre. Following is the Youtube embed:


Again notice we see the topic of anti trust pop up in reference to the modern day financial services industry. Repeal of McCarran-Ferguson is one common sense idea Gene Taylor has put forth as a way to get health costs under control through the introduction of free market competition principles into the health insurance equation.