This past weekend, we rode our horses to the top of a nearby ridge to look at the breadth of the valley in which we live. Yes, the beauty of the view was worth the trip, but as I was sitting atop my quarter horse (Shawna) looking down the long valley, weirdly, one more thought about high-frequency trading (HFT) popped into my head – perhaps some of my readers do not actually understand what HFT is or why it is unfair. So, when I returned from the ride, I did some reading to help me and you better understand this issue.
Futures magazine has in its May issue a thorough yet easy-to-grasp article on the subject. The in-depth article both explains what HFT is and why it is unfair. I recommend it to you all. In the meantime, though, I will give you a lengthy, abridged excerpt from the article that sheds some light on a rather complicated subject …
HFT, which is like day-trading on near fatal doses of amphetamines … is central to how we trade now … Over recent years, almost every measure of HFT on just about every exchange shows it is going up – fast. Perhaps more disturbing to some is that a very small group of participants are making up more than half the volume …
Individual trades vary in duration … As a rule of thumb, however, it seems any trading plan where trades last longer than a second is something else – day trading, perhaps.
Market economics change as trade duration lengthens … Perhaps the least defendable form of HFT is … flash trading, at least when it comes to equities. Under SEC rules, exchanges must rout buy orders to other exchanges when that exchange is offering a better price. In which case, the exchange loses the transaction fee … Flash orders are, in part, an attempt to end run this rule. If an exchange allows flash orders, it displays the order for 500 milliseconds before routing it elsewhere, which means that for a twentieth (1/20) of a second, certain traders have a monopoly on the trading information. That monopoly is pure gold.
The article goes on with a detailed example of a manipulated trade. The end result of the hypothetical trade is the following, which, mind you, is but one effect of this practice on all of us who are not high-frequency traders.
Many traders have noticed that prices seem to shoot through their stops much more frequently now than they used to. This is why.
In the end, insiders have always had an edge over the rest of us, but as I have said before, those like me who trade have learned to trade around this. HFT is making it impossible to trade around the insiders’ edge, as the quote below points out.
At one time … market prices would scrawl across your television screen with a 15-minute delay. There was no technical reason for this, but the delay gave insiders a 15-minute advantage, and that was reason enough. These days, the delay is a fraction of a second, but that is enough to make some people very rich.
Trade in the day; invest in your life …
