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High-frequency trading: Bad for markets... and the soul?

A trader takes a break work on the floor of the New York Stock Exchange in New York City. Commentator Dave Lauer worked in high-frequency trading until he had a crisis of conscience.

Like many people in this country, I grew up in a world that equated success with money. I read Ayn Rand and subscribed to her idea that your worth to society is perfectly measured by the amount of money you earn. I followed the path of least resistance and with degrees in computer science and finance, I wound up in high-frequency trading in 2009.

I thought I was happy. While the economy was falling apart, I was getting rich and so was everyone around me. Then last spring, the test came back positive -- my wife was pregnant. Suddenly I found myself thinking how I would explain my job to my future daughter. What exactly did I do to make so much money? What exactly was I doing to add value to the world? After two years in high-frequency trading, I could see how little value it actually created. And I saw first-hand it was nowhere near enough to offset the damage it wrought -- where computers create whipsaw volatility and fortunes are made and lost in milliseconds.

I knew in my heart that I was nothing more than a leech, regardless of how impressive my trading algorithms were. The brain drain that sucked so many smart and talented people away from noble pursuits and into financial services to earn their fortunes made me question the very foundation of my economic assumptions. I decided to leave the industry and find a new path. My passion for start-ups had been with me my whole life. I found myself craving the challenge of creating something new and the rush of excitement when something you've built resonates with other people. I knew it would be difficult to quit my job in a terrible economic environment, start a new company, and have my first child. But in my heart I knew it was what I wanted. When my daughter was old enough, I wanted be proud to tell her what I've done, and even prouder to tell her that no matter what, she must follow her passion in life like her father did.

About the author

Dave Lauer is a founding partner of the story-telling website Cowbird.
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Have a look at the way the bots were in action last week during the US Presidential election courtesy of Carl Weiss from sceeto http://www.sceeto.com
http://youtu.be/N1ouo0aeO7o
High Frequency Trading and these type of algos as a matter of fact are responsible these days for more than 70 to 80% of all the daily US volume. hfts have been quote stuffing, i.e placing massive buy sell orders within milliseconds for a long time now. sceeto is one of the first small companies anywhere in the world that tracks the hft's in real time across various markets. Have a look for yourself ,Carl Weiss has done numerous videos on these algos. http://www.sceeto.com The chief software developer of sceeto he has for a decade tested to come up with software designed a system to sniff these out and try to at least again level the playing field a bit for the ordinary investor.

Just wondering, if this thing is so evil, why are you still using that money that you earned from it?
And still at the same time bashing other people who are not likely worse than you?

I really do not get it.

I notice that the negative comments evade the issue of whether HFT is harmful and try to obscure the issue by speculating on the author's intention. But that will not work. A man who owns a cigarette factory and smokes six packs a day can say that smoking causes cancer, and it's still just as true.

I suspect that they know Mr. Lauer is right and they don't want to face it. So they employ a logically fallacious argument known as "ad hominem" to try to score an illusory rhetorical victory.

Every commenter on this site has been compromised by the system in some fashion or another. But really, how many of us have owned it as personally and as publicly as this young man? Moreover, how many of us have taken such a substantial about-face when confronted with a personal crossroads?

I find a lot of these comments puzzling, as if to suggest that Lauer quit his job knowing that a kernel of an idea would become a hot start-up, or that he planned to tell his story on MP all along.

It seems to me that Lauer had no idea what would happen at the time he left his misanthropic HFT gig. He just knew he needed to get out for what he felt was the sake of his integrity and his family. Faced with similar life circumstances, I probably would have taken the easy path: health insurance, a steady, substantial paycheck, and the cold comfort of a fat annual bonus...especially in this economy.

I therefore applaud the story, and I commend Lauer for a decision that is far too rare. I hope he finds all the things in his new career that eluded him in his old one.

Sorry Dave Laurer. I was annoyed and lost composure.
My apologies to you and your readers.

There's a basic message here: contribute something meaningful and positive to the world while you can. Mr. Lauer seems to have made some pretty significant life changes after presumably a long period of introspection. It's hard for me to think of this kind of person as shallow. By going public with this, after (again, presumably) weighing the consequences, he shows what to me is obviously a great depth of character. That doesn't necessarily mean "good" or "bad"...it means it takes a strong person to reveal this kind of personal struggle.

Perhaps his previous occupation is one some of us would consider "evil." Perhaps his appearance on NPR is only shameless self-promotion. Even if both of those are true, the relevant point remains that we all have the power to change our lives and our world, if we only dare to take the step off that ledge. It takes more courage to do that than to outright dismiss someone who doesn't think the same way you do.

Hi,
First I'd like to thank everyone for listening to what I had to say, it's really an honor to have been on marketplace. Second, I'd like to thank anyone who posted supportive (or even just substantive) comments. It really means a lot that you took some time to think before posting. To those who posted ad hominem attacks, there's really no need to respond to you.

I debated whether I should post a follow-up comment. There are a lot of misconceptions and assumptions about what I've done here, so I'd just like to quickly clear the air. I am not rich. The line was "getting rich". I'm certainly not poor either. Cowbird is not a business. It is truly a passion. There is very little intention on making money with it - we are just trying to build something great and any money made will simply go towards making it self-sustaining. I find other ways to make money, and I did not promote those with this piece. I don't feel the need to promote my charitable activities, but if you want to help support The Animal Orphanage in Voorhees, NJ (http://theanimalorphanage.org), that would be wonderful.

I hoped by doing this commentary I could be a part of the conversation on the dangers and destructiveness of high-frequency trading. I didn't realize what I was doing was unethical when I was trading, and there are many people doing much worse than I did (including nearly every politician and banking executive). But having been intimately familiar with the industry, I can say unequivocally that it does not create value relative to the destruction it has caused and will continue to cause in the future. And I believe it is symptomatic of the failures of capitalism, as is the cronyism that runs rampant in our country and political system.

My story was not meant to offend, but rather to inspire. That's also what we hope to do with Cowbird (http://cowbird.com). Maybe you can read some stories, and tell some of your own.

Thanks,
Dave

For those interested in trading and investments, Mr. Edgar Perez, author of The Speed Traders, will be leading the seminar The Speed Traders Workshop 2012 China on May 30th. He will touch upon how high frequency traders leverage profitable strategies to find alpha in equities, options, futures and FX. The Speed Traders Workshop 2012 will open the doors to the secretive world of high-frequency trading, the most controversial form of investing today, and reveal how high-frequency trading players are succeeding in the global markets and driving the development of algorithmic trading at breakneck speeds from the U.S. and Europe to India, Singapore and Brazil.

More info at: http://bit.ly/MDwlaN
Follow author, Edgar Perez on Twitter: http://bit.ly/LypXSY

The Ayn Rand angle is a red herring (or any other fish, for that matter). It smells funny. What I think is more likely is that Dave Lauer realized that his high-freq trading was a tool, a means, to create personal paper profits. He also realized that these profits do not amount to anything unless they are turned liquid. He couldn't do anything with his profits: buy groceries, a drink, a house; nothing at all until he turned them liquid. This is exactly what he did. This has nothing to do with ethics, morality, or an attempt to "redeem soul". At some point, every trader, no matter how that trader achieves their goals, has to take this step.

To be grossly unfair, this strikes me as a Story. That is, part true, part made up, and part realization. All of it created to boost the author's new business. Considering the comments and reaction (myself included), I think the Story had it's intended effect.

I wish I had understood, given my background and profession, the rules of the game surveyed above. I might have made similar choices to Dave's and "retired" to do something else. Instead, I chose to go right into that "something else" and make my fortune as a hobby. Maybe some day I'll figure out which path has the better results.

I am not completely unbiased (Dave being a friend and former neighbor of mine), but I believe every bit of this piece is true. He is a smart, introspective guy. I bet he analyzed what he was actually doing, came to what was -- for him -- a profound truth, and it bothered him.

He's also always been an entrepreneur, with projects ranging from a metals trading firm to a rare turtle breeding project in his Brooklyn backyard. If memory serves me correctly (which it has been doing less and less lately), he and his wife spent a good deal of their time and money setting up a dog shelter in Chicago. You can see why it's hard for me to believe he simply cashed in and is now engaging in self-promotion. More likely, he got bored, had some moral qualms, and gave into the inevitable: his own startup.

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