The controversy around high-frequency trading is gaining momentum again

Like any other significant technological innovation, high-frequency trading on the stock market has produced a kind of "polarization effect" in the industry - now the stock market has changed forever.

For supporters of high-frequency trading, the use of complex computer algorithms for trading large volumes of stocks at extremely high speeds is a paradigm shift, a revolutionary leap forward. For those who do not accept it, high-frequency trading is akin to Dikolmu West, flooded with criminals and gangsters. In reality, HFT trading (HFT - High Frequency Trading, high frequency trading) is, of course, something in between.
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Peter Nabicht, former executive director of Allston Trading, a high-frequency trading company, is now popularizing the benefits of innovation as a senior advisor to the Modern Markets Initiative industrial group.

“People want to treat HFT as a trading strategy. This is not a trading strategy or business model. It’s a tool, nothing more, ”says Nabicht. The tool, which he and his supporters consider the cause of a significant increase in liquidity, efficiency growth and cost reduction for all investors.

Dennis Kelleher, executive president of Better Markets, a group that supports increased market transparency, strongly disagrees.

“Only those who are paid by HFT companies are talking about the“ advantages ”of high-frequency trading,” Kelleher said. "There is plenty of evidence that market manipulation and unfair transactions are flourishing in the ranks of HFT companies."

Attempting to bypass the system?

In short, critics believe that being used for dishonest purposes, high-speed trading technology is good not only to bypass the bottlenecks of the system.

Disputes on this topic have not subsided on Wall Street for a dozen years, since the moment when computers replaced people's actions as the preferred method of buying and selling stocks. Now, despite the fact that almost all shares are traded using computers, more than half of them are related to high-frequency transactions.

Best-selling author Michael Lewis (Michael Lewis) brought out what was previously the subject of internal disputes on Wall Street, to the general public, publishing a new week a new book about high-frequency traders “Fast Boys” [the original article is dated April 2, 2014 .]. In a provocative interview on Sunday in the 60 Minutes program on CBS, Lewis said: "In the US stock market, a model market for world capitalism, fraud flourishes."

Lewis and other critics of HFT argue that high-frequency trading is used to hide billions in revenues from the markets that would otherwise have settled in the pension savings of average statistical ordinary citizens.

For example, HFT players use ingenious software and sophisticated algorithms to anticipate the movement of large volumes of shares of a certain type, usually associated with the purchase of such shares by mutual funds. In this case, high-frequency traders buy shares at a lower price, ahead of the mutual fund, and sell them in a nanosecond to a mutual fund at a slightly higher price.

High-frequency trader computers are able to perform these types of transactions with an enviable consistency and unprecedented speed.

This is hardly a new argument.

Critics believe that since the majority of nonprofessional investors are holders of shares through mutual funds that manage their retirement accounts, this long-term “skimming” by high-frequency traders increases the pension savings by billions of dollars each year.

Moreover, many HFT companies receive from the stock exchanges a fee in the form of rebates for creating market activity and providing added liquidity - a useful service that critics believe is easy to manipulate. HFT firms also pay to place their computers' servers next to the servers of the stock exchanges, which makes it possible to reduce the time it takes them to get market data for a tiny fraction of a second - this is enough for their software to start actively trading based on the information received.

“These are hidden fees lining the pockets of Wall Street, mostly at the expense of retirees who need the money,” says Kelleher from Better Market.

New York City Attorney General Eric Schneiderman (Eric Schneiderman) brought a high-frequency trading at a crossroads, recommending reforms that can level what he called the "disgraceful benefits" of technologically savvy traders.

Earlier this week, the FBI confirmed to The Wall Street Journal that the bureau is in the initial stages of an investigation to determine the legality of a number of tactics used by high-frequency traders. Trading veterans and academics who study Wall Street note that the controversy surrounding high-frequency trading is hardly new and that the resentment about this practice for the most part results from the fact that critics do not fully understand how stock trading is conducted.

Robert Jennings, a professor of economics at the Kelley School of Business in Indiana, said small investors who buy and sell 100 shares per unit of time have many chances to win at the expense of high-frequency traders because they increase liquidity and reduce the spread - this effect is created by all HFT-market makers, trying to close deals. Mutual fund investors, however, may lose over time due to the so-called leading deals, when high-frequency trading programs target large transactions and gradually eat up all the profits of investors.

Does high-frequency trading harm small investors?

“This is too complicated a question to give an unequivocal answer,” says Jennings. "It depends on how you trade."

Efficiency benefits

"This is not a new question," adds Keith Ross, CEO of PDQ Enterprises and a veteran of high-frequency trading.

Ross said that 10 or 20 years ago, minor social unrest also occurred when traders regularly used the difference in stock prices to their advantage, which was much larger than it is now - since then it has decreased by an order of magnitude. So instead of looking for a difference of five, ten and twenty-five cents, current high-frequency traders earn on penny differences and tenths of pennies.

According to Ross, an investor who spent $ 500 on investments in the stock market will receive $ 497 of investments as a result. Ten years ago, this amount would be about $ 480 after deducting commissions and other market fees, he says.

As a result, explains Ross, electronic trading and their next phase of evolutionary development — high-frequency trading — leveled (or markedly reduced) the role of expensive intermediaries, and the increase in liquidity provided by the speed and efficiency of high-frequency trading simplifies the process of buying and selling stocks at more profitable prices.

Nonprofessional investors "actually benefit from market efficiency, and I think this is a very good result," says Ross.

Still, one experienced Wall Street trader voiced growing skepticism about HFT, the wave of which was raised by Lewis's book: “One way or another, the“ fast boys ”put their hands in the pockets of non-professional investors - and little by little, day after day, year after year, they are devastated . This is definitely worth attending. "

The trader added: “For me, the most important statistics is the average time during which high-frequency traders“ hold ”positions - 11 seconds. I always thought that stocks are long-term investments. ”