Commentary

Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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December 1, 2002

Wheels of Fortune: he History of Speculation from Scandal to Respectability

By Gregory Bresiger

Also in this article

  • Wheels of Fortune: he History of Speculation from Scandal to Respectability

By Charles R. Geisst

(John Wiley & Sons, New York, 368 pages) $29.95.

This is a compelling, well-researched book that provides a good short history of the U.S. futures markets. Anyone who wants to read a quick overview of some of the major issues of futures trading can't go wrong picking up this book.

Still, despite the author's considerable learning and experience - which includes writing several books on financial issues and stints as an analyst and an investment banker - one rises with an uncomfortable feeling.

Geisst leaves the reader with some unanswered philosophical questions.

The author seems to want volatile markets - what he sometimes calls "cowboy capitalism"- without their inevitable problems, without their sometimes-financial disasters. Capitalism, which is very good at providing high standards of living for tens of millions of people, also relentlessly punishes those who miscalculate.

The Disasters

One must go with the other. Geisst seems to intimate that great regulators will save us from disasters. This is tantamount to wanting ice hockey without body checking, or the best champagnes without French influences, or unlimited pizza without unwanted flab.

Capitalism is inherently unstable and will always be as long as it is capitalism. The futures markets represent one of the most speculative aspects of enterprise. Labeling futures trading as "gambling" and speculation doesn't change its nature.

Does one want the best champagnes? Then one must put his or her Francophobia on hold until the imbibing (And what imbibing!) has ceased. If one wants free markets, which inevitably contain more than a few crazy bets that will go down in flames at the next turn of the business cycle, then one must accept that futures markets, with their sundry permutations, such as derivatives and swaps, are not for the faint of heart.

But Geisst - although no one could accuse him of calling for ridiculous regulatory schemes that usually spring up when there is a market disaster - seems very uncomfortable as he analyzes these markets.

"...some would argue that the occasional financial fiasco is simply the price of innovation," he writes, without identifying who the "some" are. (I would say the "some" include a few of the greatest economic thinkers, including Joseph Schumpeter and Ludwig von Mises).

Geisst continues, "the sums of money involved in derivatives markets cannot be written off easily. The amount of money lost in derivatives fiascoes in the 1980s and 1990s alone equals the gross national product (GNP) of the United States in the 1890s." (page 354).

Agreed, but so what? The comparison confuses me. The world of the United States in the late 19th century was a very different world.

The United States, in the 1890s, wasn't even the leading or certainly not the number one economy in the world. The comparison is inappropriate.

Capitalist Market

Surely Geisst agrees that, in a capitalistic market, there must be losses, sometimes - big losses. That's because the nature of free markets is that all plans cannot succeed, no more than 30 major league teams can all win the World Series. Or, what would be the point of the World Series?