There’s been recent debate on High Frequency Trading (HFT) offsetting traditional SIP trading protocols. The difference is due to technology, HFTs have access to direct feeds from various exchanges, SIP takes time to aggregates various exchanges’ order books. The claim that HFTs are able to front people is faise as the order is already in the market before the HFT can see it. HFTs never know what a customer’s order is before it’s in the market. HFTs have no customers. Just because it is fast doesn’t mean HFTs are cheating. This information is public and available to anyone willing to overcome the challenges of acquiring and processing it very quickly. This is just a case of technology overcoming an existing challenge within the industry or rather seeing an opportunity which is perfectly legal, safe and taking it. Much of the confusion around HFTs derives from a complicated market structure that makes perfectly legitimate behavior seem predatory to the uninitiated.
Just like in the mid-1800s, Paul Reuter created a network of carrier pigeons to more quickly disseminate news. His biggest customers? Financial firms, who predictably abandoned pigeons with the advent of the direct telegraph. The HFT is similar.
There is room for improvement in US and global equity market. The kinds of improvements that need to be implemented are mostly incremental: making the NBBO real-time, enforcing rigorously against any unfair advantage given to any participant, getting rid of the ban on zero-spread (i.e., locked) markets. These changes will improve transparency and reduce complexity. The HFT helps us push toward positive reform.
There are legitimate and interesting concerns about conflicts of interest, free rider problems and market integrity that need addressing. But these issues have nothing to do with HFT. So, even as we strive for improvements, we should try to understand that we have never in our history have seen a more level playing field in any equity market. Especially in a time when large equity firms like Warren Buffet enjoy a myraid of advantages that we’re okay with, this is a positive development.
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