Is High Frequency Trading a Force for Good or Evil?


We've previously discussed a variety of academic and political views on the costs and/or benefits of high frequency trading here on the Trading Gurus blog. If that type of thing is of interest to you as well then you might want to wander over to The Economist, where a "virtual debate" is currently taking place on the topic of "This house believes that high-frequency trading contributes to the overall quality of markets".

Proposing that motion is Jim Overdahl, currently vice-president of the Securities and Finance Practice, National Economic Research Associates, and ex SEC and CFTC. His opponent in the debate is Seth Merrin, serial entrepreneur and currently CEO of Liquidnet. As some commentators over at the Economist have pointed out, these guys might not be entirely unbiased! Despite that I'm finding the discussion very interesting, with lots of links to learned economists' findings that support both sides of the argument.  There are also lots of pertinent views being expressed from practitioners on the "virtual floor". Here's a few snippets to give you a flavour. For some reason the guys at the front seem to be much more focussed on stocks rather than commodity futures, so firstly lets hear from a "hedger" in the agricultural markets, who seems to be anti HFT:

When a farmer hedges the fall soybean crop, the slippage or range of hedging prices has almost doubled to what it was five years ago. The HFT markets has scared a lot of REAL users OUT of the market place.

On the other side of the fence here's someone who sounds like he's an "investor" in stocks:

If you think about how stock trading was done 10-20 years ago by banks over the phone, and later through internet brokers and public exchanges, you'll see that a typical HFT earns much less than the fat fees banks used to charge or fees a typical internet broker charges. Today's markets are much more transparent and efficient thanks to computer automation and HFTs. I believe nobody should expect us to go back to the 'stone age' days of trading.

The Economist's debate still has a few days to run, with the closing arguments being put forward next week. Currently the voting is 42% in agreement with the motion, and 58% against. However that vote finishes up, I feel sure that this one is going to run and run. Politicians and regulators will ultimately have much more to say on the issue than even The Economist and its readers.

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March 23, 2012

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