High Frequency Trading: astonishing but not surprising

I have always failed to understand why stock market authorities around the world, whose job it is to regulate markets for the protection of investors, permit parties to conduct high frequency trading. High frequency trading, or HFT, is not really trading at all. Companies design algorithms which enable computers to spot market discrepancies that arise in a millisecond or less on the market, and then take advantage of tiny differences by putting in very large buy orders and then very large sell orders all within a millisecond or less. It is not really trading at all, but simply a competition as to who can figure out the most complex effective formula to take advantage of what is no more than a fractional dealing between something happening and something being recorded.

When these devices are used it increases market volatility and provides a temptation for market manipulation (by putting in buy or sell orders that are then cancelled to create the millisecond discrepancy, which HFT can then use it its advantage.

HFT is becoming so profitable that IT firms are designing ways to shave a fraction of a millisecond off the time for HFT, which will provide another pot of gold for the HFT traders.

My question is quite simple: why is HFT permitted? It serves no useful purpose- it does not act as an old fashioned jobber – but it serves to create massive potential market volatility; in Europe it accounts for 40% of all trading.

A tax on every transaction, even a small tax, would put an end to HFT, if that tax was properly enforced. A very high rate of income tax on HFT would also put an end to it. It is astonishing that HFT is lawful, but not surprising.

2 Responses

  1. spot on robert. In fact it has reached the ludicrous situation where computer server centres are moving in england closer and closer to the channe, because transactions are affected by the speed of light delay for more distance servers in the data getting through

  2. I’m curious the claim that increased computerized trading increases volatility. If you look at the VIX it’s pretty much as low now as it’s been in 20 years. There have definitely been spikes, but those seem to be correlated with the macroeconomc disruptions like the dotcom bubble and the 2008 meltdown. Is there actual evidence for the link between HFT and volatility or is it just a common sense thing?

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