Wednesday, June 23, 2010

High Frequency Trading Creates an Uneven Playing Field

Here is a link to a video about high frequency trading. High frequency trading (HFT) has become an issue lately. According to the Tabb Group, HFT accounts for 61% of the volume in U.S. equity markets. I am not against it or for it. But I believe the SEC has the obligation to step in and make the playing field level for all traders. Having the opportunity to see bid and ask orders split seconds ahead of others, which is called flash trading, is similar to having inside information. Under exchange rules, stock orders are supposed to be routed to the exchange that offers the best price. This means that exchanges can lose the fee that they charge if the order is executed on a different exchange. By flashing that order for a few milliseconds, they can try to keep the order and gain the fees. This is not a level playing field for investors and traders.

Firms that use high frequency trading claim they are providing liquidity to the market. This is simply not true. High frequency trading may be providing liquidity, but not when the markets need it. Markets need liquidity when an event or crises occurs. High frequency programs are stopped if data feeds and prices are becoming abnormal. This is what happened on May 6, 2010. It reminds me of the stories of the specialists on the Street who simply stopped picking up their phones during the crash of 1987.

The firms who are using HFT are probably doing well with it and will continue to fight anyone who threatens to change the rules. In my opinion, however, HFT needs to be better regulated and the rules need to be changed to make the playing field more level for all traders.

1 comment:

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