High Frequency Trading – Fair or Not?
In class we have been looking at networks and how different players with different amounts of “power” can have advantages that allow them to secure a better outcome for themselves than others. These topics relate to the current debate about whether HFT (High Frequency Trading) allows strong market quality and efficiency or creates a unfair advantage for those using the strategy in the worlds financial markets. The strategy behind HFT involves using computer algorithms to send trade orders/executions at extremely high rates and volumes. Trades made during HFT sometimes only make fractions of a penny in profits, but the frequency of these trades allows firms using this strategy to make billions of dollars in total.
Some people critic HFT for being unfair and causing market inefficiency siting events like the “Flash Crash” in 2010. When HTF algorithms identify a target security to trade, they are able to send massive about of trade orders buying that stock and artificially raising the price of the security because of the perceived increase in demand for that security stock. It should also be noted that when a HFT firm targets a security, other HFT quickly identify this trading activity and also begin targeting that security. This is very different than trading patterns of traditional firms like investment banks who trade less on a security when they notice another bank targeting it. By artificially raising the price of the security HFT firms can then sell all of the security they hold for a profit. However, on every side of a trade there are winners and losers, so for all the profits HFT firms make there are people losing money on the other end.
In economic theory, fair and efficient markets are supposed to reflect all the available information on the items being traded. However, critics of HFT firms say that HFT are able to obtain information quicker and falsify information, like in the example above, to gain an advantage. This train of thought suggests that regulators should ban HFT because it destabilizes world markets. However, others believe that HFT actually increases market efficiency by increasing the speed at which information is distributed throughout the markets. Currently, a consensus on high frequency trading has not been met, but it is important for people to understand the effects this new trading strategy is having on global markets.
https://www.bloomberg.com/view/articles/2014-04-02/high-frequency-trading-may-be-too-efficient