HFT and the coming financial avalanche

[suityou01]

James Rickards: Beware the worst avalanche in the history of finance - Comment - London Evening Standard

But HFT bids and offers disappear as quickly as they appear based on the soulless process of the algorithm. This means they are not true bids and offers but really options. In an options contract, the holder has the right to take a profit but no obligation to perform unless circumstances are profitable. The HFT algo that enters a bid or offer has created a free option because the bid or offer can be instantaneously withdrawn if circumstances disfavour the high-frequency trader.

Once we see HFT programs as options, we have entered the world of derivatives that includes other exotic option-based products created by the banks. Bankers and regulators would have us believe that the risk in these derivatives is confined to the net exposure, but good science and costly experience prove that the risk is in the gross exposure measured by the notional value of the underlying stock. This was demonstrated by the AIG collapse in 2008.

I don't really understand how removing an offer at speed suddenly makes it an Option, because options are actually traded instruments.

But this paragraph certainly made me think

This brings us to the crux. The gross notional value of derivatives of all kinds owed by banks is already greater than 100 percent of global GDP. Complexity theory tells us that the worst catastrophe that can occur in a system is an exponential function of the scale of the system. This means that when you double the system scale, you increase systemic risk by a factor of 10 or more.

Complexity theory sounds like it's a poncey name for stating the bleedin' obvious.

[alreadypacked]

Maybe he read this
Death and Derivatives: Towards the Implosion of the Global Financial System? | Global Research


Not all bad news
Derivatives reform hits a technology and data roadblock | Futures & Options World - Let's Talk Derivatives

[doodab]

I don't really understand how removing an offer at speed suddenly makes it an Option, because options are actually traded instruments.

It's not saying it's an options contract, rather comparing the order to an option because following through on it is optional for the HFT trader. It effectively gives the trader an option to buy or sell at that price if it suits them, as if they had an options contract to do so but more or less risk free and at little or no cost.

[SpontaneousOrder]

It's not saying it's an options contract, rather comparing the order to an option because following through on it is optional for the HFT trader. It effectively gives the trader an option to buy or sell at that price if it suits them, as if they had an options contract to do so but more or less risk free and at little or no cost.

Although I always thought the main issue with HFT was the fact that they can continually skim off pennies hundreds or thousands of times a day (hence high frequency) just as I might try to skim off the spot price of silver as it's been particularly volatile - the difference being that I might get that opportunity every couple of weeks rather than hundreds or thousands of times per day as I only get a view of that volatility from ten thousand feet, rather than from 2 inches as the HFT algos do.

I'm not an expert but it seems to me as though the article misleadingly conflates HFT with 'normal' trading but with the ability to do it in short notice as computers monitoring the market might do.