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There has been a fair sum of give-and-take of High Frequency Trading (HFT) equally a final result of Michael Lewis' novel book. For example, run into the give-and-take on Leo Kolivakis' spider web log on the HFT debate. I was never straight involved with HFT equally business office of my job, exactly I run into the effects inwards the trading of my personal retail trading account. I recall the views of "Kid Dynamite" (who used to run on Wall Street equally an equities trader) is the closest to my position:  HFT may travel causing problems for large existing institutions, exactly it's largely a non-issue for retail investors (but speculators may travel unhappy). But the ascent of HFT agency that you lot should never occupation marketplace set orders, alone limit orders.

In the post High Frequency Trading: The Little Guy is the Big Winner, Kid Dynamite argues:

I recall it’s incredibly unsafe to Pb retail investors to believe that they volition ever travel on a “level” playing field.   In reality, nosotros should travel telling them that there volition e'er travel someone smarter inwards the market.  There volition e'er travel someone faster than you lot inwards the market,  there volition e'er travel someone who gets the data earlier you lot larn it.  There volition e'er travel someone who reacts earlier you lot tin react.   But the nifty affair most electrical flow marketplace set construction is that those discrepancies convey been reduced from tens of minutes to milliseconds:  the playing plain is to a greater extent than grade than it has ever been, in addition to to a greater extent than importantly: those who want/need faster access tin larn it!   That was most sure as shooting non the instance inwards previous marketplace set construction – in that location was a shut monopoly organization (NYSE specialists).   The electrical flow marketplace set construction has democratized the occupation that specialists filled formerly.  Despite all the HFT hysteria, I recall that democratization is a phenomenal thing.
In i of his linked posts, he raises i fundamental point: "Don't lose faith inwards markets, lose faith inwards marketplace set orders." With the ascent of HFT, it is extremely unsafe to occupation "market orders" - you lot e'er require to laid a limit to which you lot volition purchase in addition to sell. With the advent of flash crashes, it is possible for a $40 part to larn to $0.01 inwards a millisecond, which agency you lot cannot travel willing to sell at whatsoever price.

Once you lot brand that adaptation, transaction costs for retail investors are smaller than they used to be, in addition to in that location are amend products available (ETF's).

On the other hand, retail speculators, e.g. twenty-four lx minutes menstruum traders, are likely getting clobbered. But I failed to run into how twenty-four lx minutes menstruum trading made whatsoever economical feel inwards the kickoff place. Any investment director has to travel able to response the question: what is my edge? Even a buy-and-hold retail investor has an border - they are taking exposure to adventure premia, in addition to they convey the capacity to concord the set almost indefinitely. That is an of import advantage. An inability to concord positions cost many sophisticated investors dearly during the fiscal crisis.

But it is difficult to run into how someone sitting at dwelling watching fiscal television, using a retail trading engine in addition to closing positions at the halt of the twenty-four lx minutes menstruum has whatsoever border relative to other investors. The strategy sort-of worked during the Tech bubble, exactly that's non maxim besides much. There is no ground to believe that the fiscal markets are a magic coin auto that spits out cash every day.

Social Uselessness


It is clear that the investment inwards ultra-fast HFT infrastructure is socially useless. But inwards its defence, it is i of the few industries truly willing to brand upper-case missive of the alphabet investments, in addition to pay goodness salaries (albeit to a guide few). In whatsoever event, inwards a services economy, pretty good all economical activity is properly viewed equally useless. How much has social club invested into broadband communications then that people tin sentinel videos of kittens riding Roombas(tm)? (Factoid: a Google search for "video kitten roomba" returned 190,000 results.)

And HFT investment is non the alone culprit inside finance. Gold mining is highly ecologically damaging, in addition to nosotros already convey huge amounts of the materials already refined in addition to sitting uselessly inwards vaults (that require rattling expensive security). Banning retail investment inwards aureate would likely travel much amend for social club than banning HFT. But imagine the howling if to a greater extent than or less lawmaker proposed that!

Influenza A virus subtype H5N1 sales taxation on equity transactions would likely halt the HFT infrastructure investment madness. For example, a 1 cent per part taxation would forcefulness marketplace set makers to widen bid/offer spreads to at to the lowest degree iii cents, or mayhap fifty-fifty five cents. This would limit transaction activity, in addition to the require to contend infrastructure to back upward that activity. But it is predictable that equity trading alongside institutions would migrate to platforms that allow the taxation to travel avoided (e.g., equity over-the-counter derivatives). I am non an proficient on the legal aspects of fiduciary duty, exactly my agreement is that purchase side portfolio managers convey a duty to notice the lowest cost legal agency of transacting. The halt final result is that sell side fiscal production structuring specialists volition travel the focus of expansion instead of HFT firms. Frankly, I recall it is likely amend to invest inwards technological infrastructure than the "regulatory arbitrage" infrastructure.

If the alone objective is to "protect the picayune guy", a much simpler approach is to ban marketplace set orders, in addition to forcefulness limit orders to non larn through the best bid or offering past times besides large a percentage. This volition help preclude unprepared retail investors from seriously blowing upward their portfolios, exactly without taking sides inwards the turf struggles betwixt institutional investors.

(c) Brian Romanchuk 2014

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