On High-Frequency Trading

Thursday, July 23, 2009

Many active traders have been struggling so far this year and a lot of talk has been circulated that a primary reason is the increase in high-frequency traders. These computers trade in milliseconds scouring the market to take advantage of larger participants. In the past, the daytrader was able to take advantage of market inefficiencies in order execution of institutions. Now, the high frequency trading computer takes advantage of the daytrader and the institutions. With a recent TABB Group report claiming "that 73% of trading is attributed to high-frequency traders," it is certainly time we take notice.

Hat tip to Bear Mountain Bull courtesy of Joe Saluzzi quoting Pipeline's Al Berkeley
Pipeline’s Al Berkeley Roasts High-Frequency Traders as “Natural Enemy” of Institutions

“High-frequency traders are the natural enemy of the individual investor and the large institutional investor. Most market centers are doing things that disadvantage the individual investor and institutional investor, because they’re doing things to advantage the high-frequency trader.”

“The idea that an exchange would let one set of market participants locate their computers inside their data center and not give the same speedy response to everyone is a blatant tilt in favor of high-frequency trading. There are very few people who can resist the heroin needle of trade volume and do something that optimizes the market for institutions.”

“These markets have never been better for hedge funds and high-frequency traders–they’re magic. We have optimized our market for hedge funds to make money. How do they make money? They front-run institutional trades. Traditional long-only traders have had to go into defensive mode because of the pattern recognition software that statistical-arbitrage and other funds have deployed to look for institutional orders–to look for the tracks they leave in the tape and on the bid-ask montage.”

“If you went to a movie theater and were lined up to get a ticket and somebody ran to the front of the line and bought all the tickets and scalped them to you, would you say that was fair? All this front-running is a version of scalping.”

“You must look through to the ultimate beneficiary. Do we want a handful of bright high-frequency traders front-running the citizen-savers in the country? It’s bad public policy to have tilted our markets so far in favor of speculators. We’ve created the greatest casino the world has ever seen in our equities markets, because we’ve got so many tilts in favor of speculation and against investment.”


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