“High-speed trading has a very, very bright future, to be sure,” said Robert Kissell, an industry high-flier and a respected electronic trading scholar who has written books on the week’s hottest financial topic: high-frequency trading (HFT).
“But this future will come with new tools to help investors better uncover and navigate whether they should stay in the market or pull away,” he added. “There are things in place today that, without question, could potentially disadvantage all investors.”
Those things include legal front-running, price manipulation, spoofing, phantom volumes and questionable rebate practices.
Many mutual funds hate the HFT crowd. That’s not only because of the reputed manipulations, but also because the average trade size today in the institutional market has been forced down to a pathetic 250 shares to try to keep it under the radar of HFTs that want to front-run the fund.
And that’s a problem whenever an institution like a T. Rowe Price is trying to buy or sell a block order of, say, 200,000 shares.
The FBI and the Department of Justice have begun to investigate HFT. New York Attorney General Eric Schneiderman has lashed out at some of the practices and is himself launching an investigation.
“We support any regulator or legal agency in their quest to find improper behavior,” Bill O’Brien, the combative president of high-speed BATS Global Markets, said.
“If there are unfair practices or structural disadvantages in the US market, we equally want them identified and cleaned up.”
This debate is nothing new. “It has been raging for a while,” said Seth Merrin, chief executive of electronic broker Liquidnet.
“What this book [“Flash Boys,” see story above] has done is bring it to a head — and it’s something the regulators and market participants really have to focus on, because the degradation of overall market structure is at stake,” Merrin said.
Bill Harts, an early supporter of automated trading and a former CEO of Bank of America Specialists, says major-league investors may have grounds to criticize HFT. Fidelity and other big funds invest a lot of money for retail investors. And sometimes, they say, HFT traders are hosing them by using information on their stock orders to push up the price a penny or two — and pocketing the difference.