Aite Group
As wrote by Steve Zwick from futuresmag, Mike O’Hara has interviewed scores of traders, connectivity providers, academics and exchange operators for his web site, the High Frequency Trading Review.
He always opens his interviews with the same question: “What is high-frequency trading (HFT)?“He never gets the same answer twice.
“The problem is that ‘high-frequency’is a relative term,” says O’Hara, a former floor trader at the London International Financial Futures Exchange (Liffe). “There are, however, some common threads in all definitions: It’s computer-driven; it generates a large number
of orders in a short space of time; it’s dependent on low-latency, fast access to execution venues; its positions are held for short periods of time; it ends the day flat and it’s characterized by a high order-to-trade ratio.”
Armed with those common threads, scores of researchers, regulators and practitioners have been examining the impact this new breed of algorithmic trader is having on the markets. Papers released in the first few months of this year (many of which are available via O’Hara’s site) alternately have credited HFT with making upstart exchange Chi-X a success, accused HFT practitioners of introducing new and dangerous types of volatility into the markets and vindicated HFT for the May 6, 2010 “flash crash” that sent the Dow Jones Industrial Average on a yo-yo ride of more than 900 points in a matter of minutes, and pushed some individual equities to a penny.
By extrapolating from the findings of several papers, you easily can conclude that “good” HFT both delivers liquidity and makes money, while “bad” HFT disrupts markets, extracts liquidity and loses money. If that’s the case, disruptive trading strategies will pass away
like last year’s summer cold. If bad HFT strategies prove more virulent, however, they may require more aggressive treatment.
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