Two Snakes

This is an archived version of the PW Sources newsletter from Saturday, May 25, 2024. Sign up to receive PW Sources directly to your inbox here.


In February, Chinese regulators took disciplinary action against Shanghai Weiwan Fund Management for using high-frequency trading (HFT) in stock futures to circumvent transaction limits. And this week, British regulators fined Citi Bank for improperly implementing algorithmic trading in 2022. Analysts have linked HFT practices to flash crashes in the US, Shanghai, and the UK, but there is little consensus regarding how such practices should be regulated.

In a 2024 working paper, VINCENT GLODE and GUILLERMO ORDONEZ model the effect of industry-wide technological advancements on firms’ allocation of resources in a HFT context:

“In the last couple of decades, equity trading changed dramatically. What used to happen verbally or manually in a centralized physical location (like the NYSE) now happens digitally though a network of interconnected and automated trading venues. Computing improvements and communication advances sped up the generation, routing, and execution of trade orders—some trades now being implemented within less than a millisecond (for context, the blink of an eye takes about 400 milliseconds). This astonishing reduction in trading latency had clear social benefits by helping intermediaries find trading partners and provide liquidity to their clients at unprecedented speeds. Yet, the same technological progress has also been exploited to take advantage of transactions intended to match buyers and sellers rapidly and efficiently. Surplus created by these transactions could now be appropriated by third parties designing predatory trading strategies that include rebate arbitrage, latency arbitrage, but perhaps most importantly electronic front-running. This strategy involves using speed and sophisticated computer algorithms to identify large incoming orders and take favorable positions before these large orders are fulfilled. If an institutional investor sends a large buy order to multiple exchanges, an HFT firm can learn about it from a partially unfulfilled buy request on one exchange, outrace the institutional investor’s order to a second exchange and buy all available shares, in order to later resell them to the institutional investor at a higher price. This strategy relies on similar technologies, platforms, and execution protocols to what market makers use to provide liquidity, but uses the faster trading speeds to step in between the ultimate buyers and sellers of assets and appropriate a fraction of their gains to trade, without generating any social surplus in the process.”

+ “We refer to what many other commentators refer to as ‘electronic front-running’ as anticipatory order cancelation, a term which, while infelicitous, more accurately describes what HFTs do and avoids prejudging the practice’s welfare effects.” By Merritt B. Fox, Lawrence R. Glosten, and Gabriel V. Rauterberg. Link. And see Ricky Cooper, Michael Davis, and Ben Van Vliet on the ethics of regulating algorithmic trading strategies. Link.

+  “Investment companies operate under the guise of companies that trade physical goods. Skeptics point out that this model allows trading firms to obtain Chinese yuan through fake transactions, encouraging, as a result, the inflow of ‘hot money.’ ” By Yue Yue, Wang Shiyu, and Joe Zhang. Link. “FX trading venues have succumbed to a perverse incentive to monetize informational asymmetries.” By Dan Marcus and Miles Kellerman. Link.

“Viewing firm balance sheets as a pipeline of equity flows can uncover hidden market structure vulnerabilities and triggers for broader market failures.” In PW, Elham Saeidinezhad on regulating equity markets, part of her ongoing series on market microstructures. Link to the piece, link to the series. 



FRANCESCA TRUFFA is a Lazear Liang Postdoctoral Scholar at the Stanford Graduate School of Business. Her job market paper, coauthored with Ashley Wong, asks if coeducation has led to a greater research focus on underrepresented populations.

From the paper:

“By 1924, over 75 percent of students were already enrolled in coed institutions and the switch to coeducation between 1960 and 1975 only increased the share of undergraduate women taught in coeducation settings by 4 percentage points (Goldin and Katz, 2011). However, the transitions to coeducation of these universities enabled women to enter some of the most prestigious and research-productive universities. The dramatic increase in coeducational universities during this period was driven by a combination of cultural and economic factors. The decades of the 60s and 70s were a period of political and social unrest. Increasingly, students demanded integration both in terms of gender and race, and sought to be educated at coeducational institutions (Miller-Bernal and Poulson, 2004). This shift in demand led to a reduction in enrollment growth and declining student quality at male-only universities compared to coeducational institutions (Goldin and Katz, 2011).While cultural factors increased the demand for coeducation among students, male-only universities eventually switched to coeducation for financial reasons that were largely unrelated to universities’ demand or supply of gender-related research, a feature that we will exploit in our empirical strategy.”

+ + +

+  “Iran is demonstrating an unprecedented capability to coordinate with its proxies in the Red Sea region. This all motivates more active US and EU involvement in the Red Sea, which is exactly what we are seeing.” New in PW, Andrew Elrod interviews Kaleb Demerew and Gregory Brew on interests and conflicts along the Red Sea. Link.

+  “Doing away with classical development theories opens the way for pro-poor intervention and for the state to cultivate a fiscal mechanism to compensate the losers of development processes.” In PW, Amit Bhaduri on corporate-led industrialization in India. Link.

+  “For Arrubla, the violent dissolution of the campesino structures had severe implications under neocolonial conditions in Colombia, requiring a particularly high quota of pain for the popular masses.” Also new in PW, Sandra Jaramillo Restrepo revisits the dependency debates in Colombia through the lens of the 20th-century-economist Mario Arrubla. Read in Spanish or English.

+  “After years of growth, batteries have reached a level of operations where they now play a newly impactful role on the grid.” A Grid Status report on the role of batteries in the California grid. Link.

+  Thomas Ferguson and Servaas Storm provide a macroeconomic background analysis of key issues pertaining to Biden’s 2024 election odds, with a particular focus on the decline in real wages under inflation. Link.

+  “The role of the US hidden industrial policy as well as China’s protectionism, the weakening of antitrust, a more stringent and extensive IPRs regime, new technologies, and globalization have contributed to perpetuating intellectual monopolies.” By Cecilia Rikap. Link.

+  “Although multilateral trade agreements now seem out of reach, tax multilateralism is ascendant.” By Rebecca M. Kysar. Link.

+  “Samir Amin advocates a transition to a model of introverted accumulation through delinking from the world market. By contrast, Marini locates underdevelopment in the productive sphere.” Louis O’Sullivan reviews Ruy Mauro Marini’s Dialectics of Dependency. Link.

+  Howard W. French reviews Wang Feng’s new book, China’s Age of Abundance: Origins, Ascendance, and Aftermath. Link.

+  “The British Indian decision to demonetize silver disregarded the colony’s position within the wider subcontinental system of currencies based on the metal. This was a costly mistake. No other state followed in British India’s footsteps, while merchants and bankers lost no time in exploiting profitable swap opportunities opening up now between the British rupee, bar silver and state coins. The slump in world silver prices after the metal’s demonetization in British India also boosted subcontinental demand, which resulted in silver imports into Bombay surging tenfold to £250,000 per week between July and September 1893. ‘We are getting into a very serious hole,’ the Bombay accountant-general, A. F. Cox, who occupied a ringside view of the markets and reported about them at frequent intervals to the Government of India’s Finance and Commerce Department in Calcutta, gloomily remarked of these shipments at the end of September 1893. Worse was to follow, with weekly silver imports climbing to £350,000 in early December.” By G. Balachandran. Link.

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