High Frequency Trading

HIGH FREQUENCY TRADING

Check out the following commentary by Economics Finance blog contributor Jonas Grazulis.

Article Link:
http://www.bloomberg.com/news/2010-11-09/high-frequency-firms-accelerate-lobbying-donations-to-head-off-u-s-rules.html

High-Frequency trading has been in the news quite a bit this year, and it was mostly put into focus by the Flash Crash of May 6^th. Whether or not the firms were rightfully accused is still an open debate between regulators, while a negative light was shed on this particular type of trading.

Now, if you are not familiar with high-frequency trading (HFT), let’s review. HFT falls under the category of algorithmic trading. This means, the trading decisions are generated automatically due to specified conditions. For example, a buy signal (a long trade) will be initiated on a Google stock after a large positive surprise upon a GDP data release. Rules may be as simple as that, and get much more complex. As a rule of thumb, traders and strategists prefer systems with very simple and few rules because such a system will be able to perform well for a longer period of time, while a very complex system may only be good during certain times in the market. This type of trading is generally not what you will find in a Bentley classroom or most schools for that matter. How far away is this from projecting cash flows of a company for the next few years and determining the intrinsic value of a company knowing that you will be in and out of a trade within minutes or hours?

So why have HFT firms been in the news recently? They’re getting scrutinized for trying to find some support in Washington to defend their industry from regulators and senseless laws that restrict our markets. The SEC has been looking to restrict HFT firms from certain practices and in some cases require them to operate when conditions are not in their favor. <- Now this is the part that doesn’t really make sense to me. A firm will choose not to operate and take on risk when the conditions in the market don’t seem favorable because they think they will lose money, but the SEC wants to require them to operate regardless. For some reason I started hearing echoes of capitalism, free market, and economic interest at hand once I read this article. While the benefits of HFT have been noted by many respected market participants, the SEC is looking to curtail this practice and establish regulations that will directly impact performance of these firms and move them out of the market.

I do have a bias view in this matter, but it shouldn’t stop you from reading this article and forming your own view. Comments, questions, and opinions regarding any algorithmic trading are more than welcome.

Contact: grazuli_jona@bentley.edu