It seems as though there is an increasing amount of buzz around “high frequency trading.” Did it cause the Flash Crash in May 2010? Or perhaps it is why your P&L is negative. With only a vague definition of HFT issued by the SEC, both professional traders and the general public do not have accurate knowledge on the effects of HFT. Of course, all the voices who have anything positive to say about HFT are drowned out by traders who frequently lose because of their lack of skill, but need someone to blame. So my question is: who does HFT really hurt?
Does HFT hurt the exchanges? Clearly not, HFT increases volume and liquidity in the market. Yes, it does, in some instances, create “artificial” pricing for equities or whatever you may be trading. But keep in mind: does the price of a certain stock actually reflect anything concrete in the real world? At this point in time, for practical purposes, the market is an abstract horse race. If you cannot place a good bet, why blame it on someone else? The exchanges themselves greatly benefit from HFT, with increased volume and activity across all exchanges, it attracts even more attention from incoming participants.
Does HFT hurt individual traders? I suppose you can say that HFT may cause price manipulation, but a capable trader can figure out when not to enter a suspicious trade, or may even be able to use it to their advantage. Those who complain about HFT are often traders who would lose regardless of HFT. The market is a rough, unpredictable place. Yes, there can be relative stability in the market, but it is still only relative. Wouldn’t you be suspicious if it was easy to consistently make money on the market without extensive research and testing? Does HFT hurt investors? Of course not! They hold onto their positions for the long term, a price fluctuation in the matter of minutes does not have any bearing on their long term investment outcomes.
Does HFT hurt high frequency traders? Yes. While they can reap huge profits in minutes, they can also have astronomical losses in minutes! Not only do they lose their own funds, they are also faced by huge fines from the SEC. Also, it is here that I must note a glaring oversight on the part of the SEC. Is it HFT itself that causes anomalies in the market or is it the lack of sufficient risk monitoring? The SEC blatantly ignores the real problem.
The next time you hear something negative about HFT, put on your critical thinking hat. Does it really hurt you or is it an evolution in market participants? When facing challenges in your life, do you regularly run away and get someone else to punish the person who is more successful from you? Instead of complaining about HFT, a more reasonable reaction would be to look into affordable investments that put you on the same playing field as HFT. With advances in technology, especially those provided by DAS and its DAS|API, it is possible to catch up to these large entities. Our programming partner, Traderswired.com has affordable solutions for automating your well researched and tested strategy, giving you an edge in the market.