Edgar Perez, author of The Speed Traders: An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World, says high frequency trading is not as dangerous as politicians make it out to be.
According to Mr. Perez, high-frequency trading can be referred to as the natural progression of technology applied to the investing and trading worlds. In the process, high-frequency trading has unmasked structural issues in the U.S. equity markets that are currently being examined by legislators and regulators. Ultimately, speed traders (or ‘cheetah traders’, as CFTC’S Commissioner Bart Chilton calls them), will continue finding alpha-generating opportunities by trading new asset classes in new geographies employing more sophisticated tools than ever.
Regarding the “flash crash”, regulators had singled out an unnamed Midwestern mutual-fund company’s computer-driven trade as the catalyst that sent a shaky market into an unprecedented tailspin. The fund had been later identified by Reuters in May 14 as Waddell & Reed Financial Inc. The SEC-CFTC report, released almost 5 months after the “flash crash”, placed relatively little blame on the broad structure of U.S. financial markets, created and overseen by both regulators. Their 104-page report painted a mixed picture of high-frequency trading, which had taken heat for leaving the market that day. High-speed traders magnified the impact of the selling by the mutual-fund firm by quickly dumping futures contracts that they had bought back on the market, the report said. And broadly, these trading firms were aggressive sellers during the downdraft. But it also noted that some high-frequency trading firms remained active traders and contributed to the market recovery in the next 20 minutes.
Listen to the full interview here.