High Frequency Trading is a high-tech scam. It deceives people by using technological superiority and regulatory loopholes. The goal behind this is to wring riches from slower-moving players, manipulate market dynamics, and subvert the principles of fair and transparent trading.
Key Arguments
HFT gives an incontestable edge to large companies with the funds to invest in state-of-the-art technology, co-location facilities having their servers sit alongside exchange servers, and super-high-speed communication lines. This technology gives them the ability to respond to market information fractions of a second ahead of retail investors or even slower institutional traders, allowing them to front-run orders and benefit from infinitesimal price movements not available to others. This makes a two-tiered market in which speed determines profitability, rather than necessarily fundamental value.
Unapproved Price Movement
HFT’s effect on liquidity and volatility is contentious, though it’s widely believed that HFT contributes to both, by sometimes creating unwarranted price movements, upsetting long-term investors. By offering constant bids and offers, the proponents argue, HFT brings in extra liquidity, yet in the times of stress, their fast-firing behavior results in abrupt liquidation, generating “flash crashes” and enhancing market instability. Various studies have cited cases when the HFT programs exaggerated the moves in price, creating spurious volatility detrimental to long-term investors.
Manipulative Strategies
Ethical issues relating to HFT are real. Strategies such as “quote stuffing,” whereby a high volume of orders is quickly submitted and subsequently cancelled in order to clog the market with noise and hide true trading interest are enabled. Another enabled strategy through HFT’s speed and volume is “spoofing,” whereby non-bona fide orders are submitted in order to distort prices, are enabled by the speed and volume of HFT.
Such manipulative strategies destroy trust and erode the integrity of price discovery. In addition, the complexity and obscurity of HFT algorithms render regulation problematic, enabling potentially dangerous methods to pass unnoticed.
Case Studies
The “Flash Crash” of May 6, 2010, is a vivid illustration of how HFT can lead to market mayhem. Major US stock indices fell and then partly rebounded within minutes, and most blamed the wild volatility on the speedy and algorithmic responses of HFT as a response to a massive sell order. Regulatory probes more recently have revealed evidence of users manipulating with HFT strategies, demonstrating the very tangible fallout of such methods.
Conclusion
Overall, although touted as a technical progression of trading, High Frequency Trading shows signs of a systemic scam. It confers an unfair benefit on a few, imposes uncertainty into the marketplace, raises serious ethical concerns about manipulation, and takes place in an edgy regulatory environment that is struggling to catch up. The velocity and firepower of HFT create opportunities for the siphoning of wealth at the expense of slower market participants and the general well-being of the marketplace.
Call to Action
It is important that individual investors and the public in general become better educated about the inner workings and consequences of high frequency trading. Make the case for more transparency in trading practice, tighter regulatory control over algorithmic trading, and market structures favoring fairness and stability above nanosecond gains. The integrity of our financial markets hangs in the balance.