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 High-Frequency Trading: Menger vs. Walras

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High-Frequency Trading: Menger vs. Walras Vide
PostSubject: High-Frequency Trading: Menger vs. Walras    High-Frequency Trading: Menger vs. Walras Icon_minitimeSun Mar 11, 2012 12:37 am
While Carl Menger and Léon Walras simultaneously discovered the principle of marginal utility, their ideas about the nature of market prices are very different. Walras was more interested in the final equilibrium prices arrived at by traders than the process by which these prices were formed. Therefore, he dramatically simplified the pricing process by imagining it as if it were governed by an auction mechanism capable of instantly calculating all prices in an economy.

High-Frequency Trading: Menger vs. Walras Flashhft



For his part, Menger was fascinated with the actual process by which prices are formed. Rather than trying to abstract from the messy process of haggling by devising an artificial auction mechanism, Menger worked with a number of real-life pricing scenarios including isolated bargaining, monopoly, and competitive exchange.

As a result of these different approaches, prices in a Walrasian universe have different characteristics from prices in a Mengerian universe. Rather than registering at a single determinate equilibrium price, as is the case with Walrasian prices, Mengerian prices tend to be dispersed within an indeterminate range. In financial markets, we call this range the bid-ask spread.

Perhaps the best way to illustrate these two thinkers' differences on price is to use as our example the modern-day phenomenon of high-frequency traders (HFTs) and the digital tracks they leave as they operate in electronic equity markets.
High-Frequency Trading

High-frequency trading is the use of computer algorithms to guide trading decisions in securities markets. HFTs will hold securities for no longer than a few seconds, and for as little as microseconds. It is estimated that they now account for anywhere from 50–70 percent of all equity trades in North America.
Nanex charts

Nanex, a market data firm, provides a number of hauntingly strange charts showing the behavior of HFTs operating on the microsecond level. We provide a few of these charts below.

More: https://www.mises.org/daily/5941/HighFrequency-Trading-Menger-vs-Walras
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