High frequency trading—both its successes and failures—seem to be weighing heavily on the minds of many investors. I know at AdventConnect last month I had quite a few discussions on this topic. I fielded a ton of questions about preparing for future changes, such as enhanced technology and the predictable expansion of oversight, as many of our clients wonder how high frequency trading could impact their firms.
As history has proved, once the technology genie has escaped, it is here to stay, and high-frequency trading (HFT) is no exception. So, wherever you sit in the financial world—trader, investor, or regulator—get ready to make your three wishes for the future, but before you do, there’s some things you should consider about the infamous (or highly regarded?) practice. “You can’t put the genie back in the lamp.” Tim Sargent, CEO of Naperville, IL- based Quantitative Services Group, made this all too accurate statement about the practice of HFT.
At a very basic level, HFT is automated trading used by large investment banks to manage and fulfill thousands of trade orders via complex algorithms at extremely high speeds. High-frequency traders (HFTs) are power players of the marketplace, and the practice has become increasingly accepted, but it is nonetheless regularly surrounded by controversy.
Here is a brief snapshot of the ongoing debate between HFT advocates and outspoken critics.
- HFT firms arbitrage price disparities, reducing transaction costs, and narrowing the spread between bid and asking prices for securities
- HFT provides additional liquidity to markets
- HFT boosts “informativeness” of quotes
- HFT can increase volatility in markets due to “panic selling”
- HFTs can manipulate prices via “spoofing” and “layering,” amongst other unethical tactics
- HFT firms realize an unfair advantage over average investors, creating two financial markets and allowing front-running of other investors’ trades
Regulators have tried to curb potentially detrimental effects of HFT by proposing solutions to ensure accuracy such as: SEC-assigned ID codes, tax on stock and bond trades, and charging for market intelligence that only HFTs can access. However, critics of tax imposition cite that taxing HFTs would slow the process and render the practice virtually uneconomical.
So, are you wishing for more human reason? Less regulation? Trading in nanoseconds? The tech genie awaits your requests.
For more information about the debate surrounding high-frequency trading, take a look at, High-Frequency Trading: useful tool for liquidity or weapon of mass destruction? or, if you’re a client, join the conversation on Advent Direct Community.
If you’d like to talk about the impacts of HFT at your firm, shoot me an email at Aaron.Adolphson@advent.com.
Aaron Adolphson joined Advent in 2004 as part of the services organization. He is currently a Global Solutions Manager specializing in Trade Order Management, Connectivity, and Rebalancing.