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Tuesday, May 25, 2010

Is High Frequency Trading (HFT) Really Evil?

Posted by John Bates

I was very interested in Tim Bass' response to my posting Regulation: Don’t Throw the Baby Out With the Bathwater. You can read Tim's post here but in summary he feels that "the US economy (read individual investors) would be much better off if financial services firms (or anyone) were not permitted to use computers next to stock exchanges to seek split second “get rich quick” opportunities that the normal, traditional investor does not have. The only “economy” that benefits are entities that participate in this type of activity and the technology firms selling the hardware and software to make “all the madness” possible."

My response to Tim is as follows: I respect your views as always and understand where you're coming from. My view on this is that HFT is not driving the market big picture -- fundamentals will still do that. So people still invest in companies driven by good economics. HFT makes the market more efficient. And yes it does accentuate movements.

The point I was trying to make is that you can protect investors from some of the rapid movements that HFT can accentuate by having electronic safeguards -- like real-time pre-trade risk and real-time market surveillance. Sure I want to sell people more software - but there's a bit more to it. If I didn't work for Progress I'd still feel the same way as I do.

On the other hand Colin Clark, who had a lot of experience in real-time surveillance with his company Kaskad, posts that he doesn't blame CEP and HFT for the Flash Crash. Instead he cites issues with NYSE and market fundamentals. See his post here.

This topic definitely incites strong opinions. A lot of bankers I know often don't feel safe even admitting they are bankers in public in case they get lynched for causing such suffering in the economy!!

What do you think caused the Flash Crash? We set up a little vote which you can get to here


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Giles Nelson

There are others that support the view of better continual oversight of the markets too. Here's Hirander Misra, founder of Algo Technologies and Chi-X, speaking to the Financial Times. http://tinyurl.com/22veh6w

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