High-frequency trading: useless and manipulative?
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The explosion of interest in high-frequency trading has started to drag new faces to sometimes staid industry conferences. Traders who for years worked on algorithms and computer codes behind the scenes are stepping into the spotlight. They’re appearing on more and more panel discussions, feeling the need to defend their practice against the slings and arrows of politicians and regulators.
So far, they’ve managed to mix exasperation with good humor. The head of one high-frequency trading shop, speaking on a panel this week, said that if you believe everything you read in newspapers you might think the practice is “an unfair, highly profitable and socially useless trading strategy implemented by highly secretive and unregulated traders using superfast computers to compete with retail investors, manipulate markets and front run flash orders causing volatility in the financial markets and creating systemic risk.”
He argued that a more accurate definition of high-frequency trading would be, “a wide variety of highly competitive, low margin trading strategies implemented by professional market intermediaries who have invested heavily in technology that have the effect of making the markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors.”
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A more accurate definition of high-frequency trading would be: “Steeling”, “Frontrunning”, “Bogus Volume”
I would tentatively characterize HFT as a possibly legal but presently productive enterprise to apply massive technology, talent and persistence to the end of obtaining a decisive advantage in a zero-sum game.We here in the Maritimes have a shorter name for that — overfishing
HFT is a technologically sophisticated method for sucking profit from trades that would have taken place anyways. As such, it serves no valuable market function, instead only serving those who stand to profit from this momentary insertion into the stream of commerce. To argue that it is beneficial due to its reduction of spreads is fallacious. Improved transparency would also serve to accomplish this reduction. Legislation to mandate a minimum holding time on all purchases would do away with this practice that serves no meaningful market function.