Is High-Frequency Trading a Simple Mechanism, or an Actual Trading Strategy?

As reported by Jim Kim of FierceFinanceIT, the surge in volume we’ve seen lately has been good news for high-frequency traders, thrusting them back into the spotlight and perhaps into the black.

The surge in volume has led to another round in the battle over the value of these traders. We’ve noted that the best way to view high-frequency trading is as mechanism to trade stocks. It is not in and of itself a trading strategy. Rather it’s a means to execute a strategy. That is to say, it’s the new high-volume way to make markets or execute various arbitrage strategies. Some might quibble with that.

High-Frequency Trading Leaders Forum 2011

For example, if a fund does nothing but churn a single stock–say Bank of America–all day to capture rebates, wouldn’t that be strategy? In that case is high-frequency trading more than just a mechanism but the strategy itself? We’ve seen various studies note the upside to this form of trading, notably the higher volume and the narrowed spreads, which people assume is good for retail investors. At the same time, various trade groups are calling for more research.

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