John Carney writes that high frequency trading is an unintended consequence of regulatory action to remove market specialists:
High frequency trading grew up in the aftermath of a decades-long struggle by Congress, the SEC, and the stock exchanges to stamp out the specialists, who were accused of front-running customers, favoritism and interfering with the smooth operations of markets…….. Things really came to a head after the dot-com crash, when everyone was looking for someone to blame for all that money lost. By 2005, the government passed a series of market reforms that were aimed directly at eliminating the specialists. In the wake of those reforms, commissions fell, pricing improved, exchanges became more competitive—and high-frequency trading arose.
Seems they have swapped one set of problems for another.
The safest way for retail investors or traders to minimize the cost of HFT market interference may be to participate in opening or closing auctions where bids are matched by algorithm.
What about the roll of technology in HFT (“because we can”)? HFT is a new way to front-run the customers. What I don’t get is why are we allowing it? Maximum speed networks are being built just for HFT. Are they betting that HFT will continue to be allowed, or is it so profitable that by the time regulations have been put into effect they will already have recouped the full investment plus…?
I guess they are working on a short pay-back period for their investment.