How will regulations impact the way traders are capturing alpha? Would there be restrictions that can possibly harm algorithmic trading? ... What is the outlook for the markets when all participants engage in the arms race of super smart algorithms? Where will institutional and retail investors find opportunities? Conversely, could we imagine a world without high-frequency trading?Yes, we are all relieved to know that the High Frequency Trading Leaders Forum 2013 - you know, the one that 'Every Trader and Quant in London is Talking About' - is to be held in London on 5 December. These traders and quants are some of the most brainy people there are. Hitched up to supercomputers these geniuses make a lot of money for themselves and their employers.
I can't condemn these people, whatever the net results of their collective actions. These people are reacting rationally to the incentives on offer. It's the incentives that are perverse. If people can make enough cash to bring up a family by shaving off one millisecond per financial transaction more than the next guy, then that is what they will strive to do. It just strikes one as sad that we don't have systems in place that would channel these bread-winners' undoubted immense ingenuity into more socially useful activities.
That's where Social Policy Bonds come in. Their tradability means that a bond regime can target broad, long-term goals that require diverse, adaptive approaches the nature of which we cannot currently conceive. The existing policymaking system deals with these goals, which include things like avoiding catastrophic disasters, stabilising the climate or even improving world or national health, haphazardly, if at all.
Of course, quants and other high-earners possibly do contribute more to tax revenues than ordinary people - especially if they are badly advised. But, as we can see, governments generally don't do a great job at deploying this revenue to deal with long-term, large-scale problems, like avoidance of conflict or climate change. Again, their incentives to do so are minimal and mostly focus on power; retaining it, or acquiring more of it.
A Social Policy Bond regime would allow us to target broad global and national goals explicitly, while channeling the market's efficiencies into the best use of our limited resources. Given that the survival of the planet itself is under threat, I think the case for such targeting is a strong one, even if we have to give up high-frequency trading to get there.