Is High-Frequency Trading Really Fast, Loose, and Out of Control as Newsweek Says?

Newsweek says “High-frequency traders, who on the whole have maintained a low profile, say that because their frenzied trading provides liquidity, they help markets run smoother, improving the environment for all investors. But combine the speed at which they operate, the outsourcing of decision making to computer codes, and an almost complete lack of regulation, and this shadow market can fuel and exaggerate volatility.”  Is that really true?

Ben Van Vliet, professor, Illinois Institute of Technology

Newsweek report goes on to say that “it is precisely this ability to profit amid widespread carnage that has aroused the attention of regulators. Many have come to see high-frequency traders as nothing but digital piranhas, creating feeding frenzies that send the market into violent swings for their own profit. Still, the first wave of regulation to come after the Flash Crash hasn’t been aimed at speed traders but at the exchanges, which 10 years after going electronic are still largely a patchwork of cobbled-together systems. So far, high-frequency traders have emerged unscathed. Experts like Ben Van Vliet, a professor at Illinois Institute of Technology, believe big computer traders like GETCO and TradeBot will one day become something akin to electric utilities: entrenched, highly technological industry players with virtual monopolies on the market. Like utilities, though, HFT may soon be regulated. As this prospect increases, speed traders are taking a page from the more established players on Wall Street. In March, Manoj Narang began meeting with SEC commissioners to try to ‘enlighten’ them about HFT. ‘I am more optimistic that regulators will not do irrational things than I was a couple months ago,’ he says. The real worry is whether markets, and the machines that increasingly drive them, will do irrational things.”