Why You Shouldn't Worry About High-Frequency Trading

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Market Frenzy Analysis
Richard Drew/APThe day after the 2010 flash crash.
There are plenty of things in life you need to worry about, but high-frequency trading isn't one.

When I shared this thought with my colleague Nick, his response was "As in, don't worry about the HFT guys allegedly skimming billions off the market by arbitraging microseconds?"

"That's right," I said.

Why High-Frequency Trading Is Decreasing

Some brokerage firms use super-expensive equipment to get access to more information and get that data faster -- slivers of a second faster. The edge allows them to trade in and out stocks in a flash and make a profit of maybe a thousandth of a cent per share. But since they do this millions of times a minute, these fractions add up. They also use their technological advances to flood the market with bogus trades in an effort to confuse the market and confound competitors. It's a billion-dollar industry that some people are up in arms about. Let me tell you why I'm not one of them:
  • The industry is shrinking. According to the New York Times, HFT firms are going to bring in $1.25 billion this year. That's serious money, but a 35 percent drop since last year and a 75 percent slide since 2009. According to the Times, many firms are closing or cutting staff.
  • There is less opportunity. Profits are dropping. Overall trading volume has declined, and that means fewer prospects for high-frequency traders to work their evil.
  • It's becoming more expensive to maintain the technological edge. To shave off the first 30 milliseconds was easy. The next 30 milliseconds will be very costly.
  • As word got out about HFT six or seven years ago, more players jumped into the game. That increased downward pressure on profits and also introduced mutual funds to this technique. Since at least some mutual funds are HFT traders, investors themselves are participating in the profits, too.
  • Increased scrutiny from regulators around the globe means players are less enthusiastic about getting into or staying in the game.
How HFT Helps and Hurts Small Investors

On the positive side, studies suggest HFT helps investors by creating liquidity and reducing the cost to trade buy keeping spreads thin.

On the negative was the May 6, 2010 "flash crash," in which the marketed cratered 9 percent. The crash happened as a direct result of one transaction -- a $4.1 billion sale of futures contracts.

But I'm not even worried about that sort of event recurring. First, odds are high that measures soon will be put in place to curb this kind of wackiness. The Chicago Federal Reserve suggested several controls.

And the market itself is at work. The market did crash 1,010 points on that terrible day in 2010. But it regained every cent within minutes. Why? Because the same algorithms that flashed "sell" turned around and flashed "buy" when they recognized the prices were artificially low. These flash crashes are problems, but they self-correct. Long-term investors won't be impacted by HFT.



[Correction: A previous version of this article inaccurately described the opinions of Eric Hunsader, owner of market technology and data firm Nanex, on HFT, based on an article in Forbes. DailyFinance regrets the error.]

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davo1941

Screw wall st. put Jamie Dimon's head on a pike at the steps of the exchange and all the other crooks will get in line

April 13 2014 at 8:01 AM Report abuse rate up rate down Reply
thadlick

Are you kidding me? These people are making billions for themselves by rigging the game while adding no value or making any contribution to the economy. The average person now has absolutely no trust in the system. Can you imagine what is going to happen next time these greedy people crash the financial and stock markets? There will be no government bail outs for the "too big to fail" and we will descend into a depression that will make the 1930s seem like a slight downturn.

April 11 2014 at 8:53 AM Report abuse +2 rate up rate down Reply
pfjw

OK- let me see if I understand - traders are cheating for a profit. Legal, perhaps, but when the term "bogus trades" is used, the bottom line is cheating.

It adds up to billions, not much per trade, but billions none the less. So, if a few pennies comes out of my pockets to make some trader fat, I should not sweat it.

Much like being a little bit pregnant.

April 11 2014 at 8:39 AM Report abuse +2 rate up rate down Reply
thefacts22

The market will at last come back to reality,constant trading is a sign of speculation by selected groups of gamblers,QE is no more than a false tactic of fiction to "spark" economic activity,while USA and the Feds have used every trick to promote it,is not a solution,one of the victims is that our currency is collapsing

April 11 2014 at 7:57 AM Report abuse +1 rate up rate down Reply
thewebdoctorisin

Just checked the author's bio and he is a CFP. Big deal! Writing these articles for self promotion to gain new clients....lovely. This article should be marked as an ad.

April 11 2014 at 7:48 AM Report abuse +2 rate up rate down Reply
dencuddy

They rig the market and then try to tell us not to worry about it.

April 11 2014 at 7:43 AM Report abuse +1 rate up rate down Reply
thewebdoctorisin

Who is this author and why is he trying the jedi mind trick on this with us? These firms cuase the purchase price of a stock I wish to buy to become more expensive to me during a trade, does that sound ok to you? If it does, let me be your broker please and I will gladly steal money from you every time you trade! What an idiot!

April 11 2014 at 7:16 AM Report abuse +1 rate up rate down Reply