This encompasses the use of computational algorithms to trade securities at high speed; this mainly concerns the holding of short positions in regards to seconds and even fractions of seconds. The competition in this sector is mainly from other high frequency trading systems. It does not follow the common trading approaching of buying and holding, but through carrying out many trades within a shorter period of time can lead to a higher Sharpe ratio (the calculation between trade risk and reward). However there are concerns that considerable uptake of this system can introduce greater systemic risk, with the most recent example being the 2010 “flash crash” where there was an instant withdrawal of liquidity from the market.
However, recent study has shown that high frequency trading (HFT) can actually contribute to market efficiency, as it helps to reduce what is seen as “noise” (short term price volatility). The risk seen in HFT is mainly concern from its extended usage as it accounts for half the volume of US equity trading, and 35% of Europe.
How does HFT provide better efficiency in markets?
The first advantages to HFT were noted in the “Foresight” report which published data that revealed the improved liquidity in markets, and a reduction in transaction costs. Additionally, it promotes what is seen as “price efficiency” where the trading occurs in the direction of permanent price change, rather than pricing errors in short term volatility or transition between equities.
The article from the FT looks at how governments are considering introducing some form of regulation for these markets to ensure there is no looming systemic risk. However there are many that comment that incorrect regulation will stifle the benefits found in HFT, additionally regulation may hinder the current “highly competitive environment” which HFT produces.
It will be interesting to see what kind of regulation will be produced in regards to HFT, as it is clear that it requires a very different approach from the intermediation sector which is already highly regulated. Although HFT on the surface seems like a quick way of making money, it is important to note the high barriers to entry, in that many servers are need for computational power, and each fraction of a second advantage can mean a whole array of different profits.
The Crisis of Capitalism, are we really using the right system? Capitalism has been the champion of the free market system, but is there an issue with the foundation of our system.
David Harvey talks about the inherent failures of our system, but is there really a better alternative?
I personally believe that in this video David Harvey is biased against the capitalist system. He does make a point of taking a Marxist point of view to address the issue of barrier points that capitalism may face, and this sets the tone for his perspective. From my understanding Harvey is in favour of more regulation, as he spoke about financial ingenuity and innovation he basically slandered the movement from manufacturing & industry to finance. Due to his bias I believe he failed to develop the point that this change had been positive at the time and lead to substantial economic growth. I assume that Harvey’s stance would be towards a command economy, due to the several factors he mentions.
There are five general points developed, Harvey makes a notable reference to Alan Greenspan’s comments on the crisis (many people had blamed him to be a contributing factor to the sub-prime mortgage crisis) as Greenspan notes that it is human nature that lead to the failure (human frailty). This is in reference to qualities such as greed and instinct for mastery, on this point I would have to agree with Greenspan as no matter what system is used we are a big factor in contributing to error (impossible to have a perfect free market, purely theoretical). The second point is the obsession with false theory; at this point I believe that Harvey establishes him to be against free market economics. Harvey considers that peoples false belief in the efficiency of markets is what contributed to crisis, and mentions Hyman Minsky’s theory of the inherent instability of financial activities. To an extent I would agree that absolute belief in the efficiency of markets can only lead to systemic failure, as free markets are prone to speculation and the development of bubbles. I believe that Minky’s theory is a fair while analysing economic trends, as instability at certain periods of time is almost unavoidable.
I personally believe that an error of free market economics that led up to the financial crisis was the driving up of the credit economy, which was a result of wage repression after the 80’s. The development of the credit economy let people live beyond their means (increase in effective demand). However there was a vast accumulation of debt, and In the U.S. it was concentrated in the housing market this was a contributing factor to the crisis. In Minsky’s theory he mentions that a mechanism that pushes towards crisis is the accumulation of debt by non-government sectors. I believe that too often the 2007-2008 financial crises is blamed on poor policy and institutional failure and not enough on the fact that the people are to blame as well as those in power.
I fully appreciate David Harvey’s perspective, however I believe whether it is a capitalist system (free market) or a socialist one (command economy) failure and crisis is inevitable part of economics, a part of human nature. We attempt to apply theory to reality, and in that is the digression of successful economies.
The United States is currently the biggest exporter of corn, and the world corn trade prices tend to be determined by the U.S. markets supply & demand relationship. Due to the U.S. influence on corn prices, there is a price dependency on weather in the U.S. Corn Belt.
The price of corn has dramatically risen since May 2012. On August 10, 2012 it reached a peak of 843.75 cents per bushel this price is above the peak corn had reached in the 2007-2008 food crisis where it peaked at 765.00 cents per bushel. The increase of price during May and June can be attributed to wet weather around the United States; this led to the delay of corn planting. But the price began to soar towards the end of June and into July, as the most serious drought in the past five years hit the Corn Belt. The drought led to wilted fields and radically reduced the supply of corn; the USDA (United States Department of Agriculture) estimated a corn harvest that is 13% lower than last years. However demand throughout the summer stayed relatively unchanged as the price has still not dropped below 750 cents per bushel. The great constant demand for corn is due to the need for it to be used in livestock feed, and recently livestock producers are planning to work under capacity to reduce the consumption of corn until the prices drop back down. This has led to speculation that demand destruction can occur, due to the continued high prices and livestock producers planning to reduce consumption. The reason that there is only speculation of demand destruction is due to the demand for corn in the production of ethanol and corn syrup (contains fructose from corn). The use of corn syrup is guaranteed in various fruit drinks, soft drinks, and candy; this is due to high prices of cane sugar. Due to the various factors mentioned corn is able to maintain such a high price during a time of vastly reduced supply, due to the lack of downward shift in demand.
A permanent downward shift of the demand curve, most commonly occurs when a price of a commodity has for a long period of time been constrained of supply or high in price.