High Frequency Trading – Separating the Wheat from the Chaff

High Frequency Trading (HFT) continues to capture headlines even after markets have long since recovered. Since the first Atlantic cable, markets have invested in faster execution - lower latency. So what's the problem?

The FSA referenced one - spoofing - the practice of placing many fictitious orders to push the market in one direction or another and then cancelling them within seconds, then placing new orders that capitalize on those movements. One suggestion is that spoofing even contributed to the flash crisis, delaying the delivery of pricing to other HFT traders frustrating their ability to respond to unprecedented pricing opportunities.

Another question mark has been trading ahead of customer orders. By the time the customers' deals get done the market may have already moved adversely.

There are other questions such as whether or not market access requires such an investment in technology that the few may benefit at the expense of the many. HFT is a bit like the pre 1914 naval race. You've got to have a dreadnought to get in the game.

Others worry about trading efficiencies being more important than the real purpose of markets - making it easier to raise capital.

Perhaps there is also the question of whether the market has the bandwidth to support high frequency price discovery at the same time as high frequency trading. Does the uneven distribution of technology add to market risks?

There are many practices and processes that need to be fixed. But that doesn't make HFT the devil's anvil. For the time being HFT is the market's future, and we should support its success by addressing some of the challenges it faces.

One such challenge is its long term future.

Every week another trading venue claims a new latency milestone. To flourish HFT has to continue to extend the number of decimal points on tick sizes, transact at infinitely faster speeds and capture more flow or the market may consolidate.

HFT is a bet that technology will continue to improve exponentially. All indications are that it will. One thing's for sure. Thanks to HFT, when it comes to trading we are not in Kansas anymore. We are not even on Wall Street. We are definitely in New Jersey

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