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Unhelpful Information




Streetwise Professor, the blogging persona of Craig Pirrong, recently jumped into the fray regarding  high frequency trading. Find his comments here.


Unless you've been following the HFT debates carefully already, the opening grafs there might put you off. Pirrong is positioning himself relative to a range of other commenters, Stiglitz, Salmon, DeLong especially.


I'll cut to the chase for you. One of the issues created by the existence of HFT --and by the related fact that it is impossible for everybody to be equally fast or equally sophisticated in their algorithms, so there is an arm's race and a have/havenot split -- one of the issues is whether this circumstance discourages the gathering of information.


Joe Trader might well believe in making decisions the old-fashioned way -- studying up on the corporation issuing certain stocks and bonds, looking at such factors as the competitive pressure in that corporation's product lines, considering the ratio of book value to market cap --- and then buying or selling according to the data. BUT ... if Joe Trader is a havenot in high tech he may soon find that the haves can quickly game any decision he might make. The profit that should reward the diligent research goes to them in the end, not to him.


One reasonable line of thought, then, concludes that Joe Trader will be discouraged from doing the now-useless research, and the market as a whole becomes a less well-informed place.


Pirrong adds a new wrinkle here, though. He says that some of the information that Joe Trader might otherwise be busy gathering isn't socially useful anyway. "[M]any of the informed traders who HFT firms sniff out are producing information that does not improve any economic decision on any margin " As an example, "better information about an impending earnings report can be very profitable, but revelation of this information doesn't improve decision making."


Fascinating plot twist, no?
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