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Anticipation of crises and the socialization of risk
Not many people know, but the crash of 2007-2008 was anticipated by many recession prediction models, because there were signs in the financial markets that something troubling was going on. The biggest problem in the current situation is that central banks have hidden several market signals with unconventional monetary policies. QE’s of world major central banks have pushed the risks of several asset classes to far ends of the probability distributions. What this means is that if the actual price of an asset does not meet its market-based value, the true level of risk is not properly priced in. Socialization of risks of private entities with monetary or fiscal measures hides the risks behind politically motivated decision. This is probably the biggest risk threating the world economy, that is, the mispricing of risk by unknown magnitude.
So, where are we heading? Unfortunately, all we know with a fair certainty is that we are facing some form of a downturn. It may be a mild one, but if any of the above listed risks would to materialize, the downturn would have the potential to turn into a systemic crash under current conditions. What this means is that we currently face a highly uncertain future with fairly decent growth prospects and that we can do very little to diminish the uncertainty, but to hope for the best.
that we can do very little to diminish the uncertainty, but to hope for the best.
An automated trading system (ATS) is a computer program that creates orders and automatically submits them to a market center or exchange.
High-frequency trading (HFT) is a type of algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons. HFT can be viewed as a primary form of algorithmic trading in finance. Specifically, it is the use of sophisticated technological tools and computer algorithms to rapidly trade securities. HFT uses proprietary trading strategies carried out by computers to movein and out of positions in seconds or fractions of a second.