Why? Stock markets and futures markets are still pretty damn good places for information discovery. Look at how the 10-yr future reacts to Fed announcements, or Corn futures react to usda releases. If markets had no price discovery ability left, then it should have no trading at all, or extremely smooth pricing since everyone already knows everything. Neither is true. There's an old saying right? It's a good deal if neither sides are happy. Everyone's miserable in the market place - maybe that's a good thing?
Would stock prices or bond prices be at these levels without the intervention of the Fed? For example, for the majority of Americans (or at least a large minority), the rate on the 30yr bond has no relevance to their lives. They probably couldn't get a mortgage, and if they could it would be nowhere near the 3-4% that the 30yr trades at. More likely they borrow at loan shark rates 20-30%. Pure price discovery for me is about the interaction of buyers and sellers without the government stepping in and manipulating prices. One other point that I suspect some may find more contentious. Let's say that HFTs do 70-80% of the volume in may contracts. Here we have markets that are dominated by computer programmers and to expect them to give their full attention to economic fundamentals is unrealistic. Massive generalization here, but these are people whose first interest was not in the markets anyway. They are more interested in slipping and sliding or whatever the latest craze is. Their interest in finance probably doesn't spread much beyond doing an Econ 101 class. Therefore they are biased in their outlook and will take on board ideas such as the stock market always goes up in the long run as does the housing market. Nothing necessarily wrong with that -after all markets are about differences in opinions. However when one class of traders is allowed to completely dominate trading then the market is pushed towards their bias and thus there is far more potential for the market to move away from fundamentals. (Going off at a tangent, I find this particularly the case when it appears to me that the vast majority of Americans, programmers, MBAs included, simply have not been taught to think for themselves -look how most of the public are currently caught up in this Reps Vs Dems charade) Look at what happened in Oz. The market steams through all time highs simply because some HFT sniffed out some stops. This really didn't reflect market fundamentals and was not price discovery in the capitalistic model as I understand it. I don't agree that no pure price discovery results in no trading or extremely smooth trading, but certainly the argument can be made that it generally results in more chaotic and volatile price movements at times.
This has nothing to do with what I was talking about. "Pure price discovery for me is about the interaction of buyers and sellers without the government stepping in and manipulating prices" is purely a definition made up by you, for you. It's has little relation with what everyone else understood 'price discovery' to mean: the incorporation of new information into the pricing of a security. It's beginning to seem like you just want to rant about the government. Fine - I hate the state of the government too. We are just no longer talking about HFT or the market place.
Well my first argument was that in the case of bonds we are discovering a yield that doesn't present any useful value in the real world. So we are discovering a value that has little use, and is not a true value. However my second part was an argument about how with the current status quo, HFT is further distorting price discovery given the actions of the Fed. I will refrain from ranting against the govt further. My only real point is this. So often I hear complaints answered with -suck it up, this is capitalism. However the truth is that we have very little that approximates capitalism left in the US. Many pro HFT arguments are made on that basis with the jokes thrown in about abacuses, horses and cariages, you get the picture. I think that is a false premise to start from.
I disagree with both points. In the first instance, the sole existence of a government bond market is that... governments issue bonds. It doesn't exist without government 'intervention'. There's no value to discover where the market is willing to lend to government? Tell that to Italy or Spain. For your second point: "HFT is further distorting price discovery given the actions of the Fed" is a bit of non sequitur. Are you saying that HFT is ultimately affecting where securities are priced at time scale greater than a few hours? And what does Fed's bond purchasing have to do with HFT, exactly? There's another guy who argues that Central Banks directly affected HFT; Yet, he fail to identify any plausible channel of transmission, except 'leverage' (of course, HFT is not capital intensive).
'given the actions of the Fed' -as in - taking the actions of the Fed as a given. I did not express myself clearly, was making no link between the two and can see how that sentence can be interpreted as you have. With the HFTs dominating the volume is many markets, I don't think it's possible that their action wouldn't influence the direction of the markets. I have heard touted as conventional wisdom these days that 'the market still goes where it is going to, it just gets there in a different fashion'. I disagree with this. Let any group/class of traders dominate a market and it will end up at a different price due to the inherent bias of that group. This is not a criticism of HFT, it's a criticism of any group that dominates the market. Here's an example. On the day of the flash crash, do you think that the market would have settled at the same price that it did, if the flash crash had not occurred? I don't think it would have settled at the same price that day or even the next week. I think that increasingly we are drifting away from real value and toward a value based on the assumptions and biases of the models used by the HFTers. Increased participation by other market participants with their own biases would help balance out those of the HFT crowd. I've seen markets dominated by certain classes of traders over my career, but never to this extent, that's why I'm making this point.
Here's the part where I disagree - I don't believe HFT has any persistent effect on value; Here's my argument: So company A has a 'real value'. We don't know what it is: a momentum investor sees its value differently from a value investor, who sees it differently from a market maker. The idea is that when all these guys come together and put their money behind their opinions, and the hence the information discovery ability of the market. So to this we now add HFT. HFT guys have no real opinion to express on the long-run value of company A. By definition, they are doing whatever it is they are doing on a tiny time scale. If they do distort the value of company A over a longer time-horizon, couldn't a value investor come in and make money on that distortion? So, why can't HFT's distortion of real value be arbed away like any other distortion from any other group of players? Do we, in fact, have any evidence of persistent distortion of prices that persist over time? (btw, I want to thank you for at least a sane and civilized conversation; this topic usually draws out the crazies
And now I am close to living it. I have a MMing system that is displaying chaotic dynamics, and possibly NON-DETERMINISTIC, NP. Even changing one parameter (the most important one) by less than a fraction of 1% is drastically changing the profitability. It makes me wonder...
Back in this thread I posted a video to Jane Street use of OCAML and a generally interesting video. I am posting them again because the video was embedded for the old ET system, hence it shows up all garbed. Here it is again: