Does anybody understand why there is a brewing issue around high frequency trading? In the past few days this “new issue” has turned into a firestorm among regulators, politicians and the news media.
Not only is this not a “new issue”, as indicated by many well known and reasonably intelligent people, but it should really be referred to as “old hat”, “yesterday’s news” or something that more accurately portrays the fact that high frequency trading has been part of the marketplace for years. High frequency trading strategies have been utilized by electronic market makers, proprietary trading groups, or trading divisions within major broker/dealers utilizing computers (which can obviously process information more quickly than a person) for years (since the evolution of an electronic marketplace in the late 1990’s). Additionally, co-location of servers has been around the same amount of time. Not only do the major broker/dealers have co-location agreements in the market place (most notably in Carteret, NJ at NASDAQ’s data center) so do many other firms, including Lightspeed Trading, to service in the best possible way, both retail and institutional customers.
High frequency traders utilizing automated trading and front-end technology strategies provide an important function within the marketplace. These traders have become the de-facto market-makers. They have stepped in and replaced the liquidity that was provided by traditional market-makers in the past. Without them, the markets would become less liquid and make it more difficult for retail and institutional traders to enter or exit their positions.
The news coverage has made a big deal in the last few days to state that high frequency trading disadvantages the “average” or retail trader. In several cases it has been said that the average person has no way to have these same advantages. That is simply untrue. Contrary to these “stories” (which are close to fictional in some cases), co-location and the associated trading costs (commissions) are not cost prohibitive to retail traders. Right now Lightspeed has many customers who co-locate a $5,000-$10,000 server under Lightspeed’s co-location agreement with NASDAQ.
What is utterly ironic about this “new issue” is that people are focusing on all the wrong issues. I leave you with this:
If we are so worried about the effect of High Frequency Traders upon Institutional and Retail customers we shouldn’t be talking about co-location and automated trading strategies. We SHOULD be asking the following 2 questions:
- Why do major broker/dealers who have their own proprietary trading divisions that utilize automated trading technology compete with the clients they are looking to serve?
- If speed and a level playing field is so important to retail customers, and I strongly believe it is, why isn’t every retail customer using a direct access trading platform (and getting rid of an out-of-date web based platform), that is co-located, which has all the institutional tools built into it (for example, Lightspeed Trader)?
Fast action by computers is great, I use algo trading in the futures arena. But if one participant has the ability to see an incoming order that will execute against his resting bid or offer, and pull that resting order before it gets hit, all market integrity is gone.
I feel that an incoming order should execute against any resting order that may be there, before a black box can pull those resting orders.
Sounds politically motivated to me. Do our politicians really care about “average” investors? No. They led people into investing all their retirement funds in the stock market knowing trouble was brewing for them there. They have some other motive for this sudden concern. Anyone care to hazard a guess?