Even though this is a perfect illustration of things I talk about in the book, I'll do one more round of quotes (which'll find their way into the book), then turn to other things.
First, via Andymatic, this piece from Ars Technica:
Supercomputers pitted against one another in a high-stakes battle of attack and counterattack over a global network where predatory algorithms trawl the information stream, competing every millisecond to gain an informational advantage over rivals. It sounds like Hollywood fiction, but it's just an average trading day on the stock market.
Because high-frequency trading is, as Richard Bookstaber has recently described it, an "arms race" where relative speed matters much more than absolute speed, this market is one of the few left with a demand for raw performance at any cost. Indeed, my personal introduction to the world of HFT came in bits and pieces over the past few years via parts of briefings from the Intel, NVIDIA, AMD and their would-be competitors, all of whom have been aggressively pursuing this market….
In all, it's ironic that the hardware that HFT platforms are using to battle it out over stocks, bonds, commodities, and other assets is essentially the same as the technology that PC gamers are using to play their own games with much lower stakes.
And this observation from Rich Bookstaber:
I think the days for high frequency trading are numbered. For one thing, high frequency trading is capacity constrained like few other strategies. The high frequency trader is basically a stand-alone market maker; he is sitting there to provide liquidity to others. And one way he provides it is to pull in the positions that others will shortly be demanding – thus the need for speed. If the footprint for high frequency traders gets too large, they become liquidity demanders themselves, and the gig is up. The Renaissances of the strategy will make their way through, but generally we will see a lot of shooting stars.
A second reason is that high frequency trading is embroiled in an arms race. And arms races are negative sum games. The arms in this case are not tanks and jets, but computer chips and throughput. But like any arms race, the result is a cycle of spending which leaves everyone in the same relative position, only poorer. Put another way, like any arms race, what is happening with high frequency trading is a net drain on social welfare.