Tags: Investors | Love | High-frequency | Traders

Why Investors Should Love High-frequency Traders

By    |   Thursday, 03 Apr 2014 07:50 PM

High-frequency traders are attempting to defend the practice against a wave of recent criticism.

High-frequency trading, lighting fast trades based on computers and algorithms, has benefited the overall market by lowering trading costs, tightening spreads, and raising liquidity, according to Peter Nabicht, senior adviser at Modern Markets Initiative, an advocacy group for high-frequency trading firms.

"I don't think you necessarily have to counter that high-frequency trading is predatory because it's not," Nabicht told CNBC. "High-frequency trading is simply a tool, a tool used by a wide variety of participants in the market for a wide variety of reasons. It's how they transact."

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The practice has come under scrutiny following publicity of Michael Lewis's new book "Flash Boy" that asserts the traders have rigged the market.

"I think there's confusion here. I don't think high-frequency traders, professional traders, are competing with the general public. They compete with each other but not with the general public," Nabicht said. "Trading and investing are two very different things."

There is predatory behavior in the market, he concedes. "Take, for example, true, actual front-running, having information no one else has about your customer's order and acting on that before that customer order goes to market. That would be predatory."

With high-frequency trading and automated trading, firms can scale across different platforms, products, asset classes, Nabicht said. "The fact that they can do that in a cost-efficient way means that they can trade in a variety of places all day long."

Others disagree. The Charles Schwab Corp. argues that the practice endangers our free-enterprise system.

"High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets," said Charles Schwab, the firm's founder and chairman, and Walt Bettinger, president and CEO, in a statement. "It’s a growing cancer and needs to be addressed."

Stock exchanges support high-frequency traders by providing preferential data feeds and developing multiple order types designed for their benefit, they say.

"High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants."

High-frequency traders had over 300,000 trade inquiries each second last year, up from just 50,000 only seven years, according to Schwab. Actual trade volume relatively flat over the same period.

"It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game."

Editor's Note: Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

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High-frequency trading has benefited the overall market by lowering trading costs, tightening spreads, and raising liquidity, according to an adviser at Modern Markets Initiative, an advocacy group for firms that engage in the practice.
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2014-50-03
Thursday, 03 Apr 2014 07:50 PM
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