After three years of severe market volatility, and a jaw-dropping flash crash, the financial rock star phenomenon known as high frequency trading (HFT) looks a little burned out. Like many rock stars, HFT seems to be suffering from too many late night parties and some incredibly unflattering press. And its business managers — regulators and exchanges — are watching closely for signs of abuse, making it more difficult for HFTs to get away with anything.
HFT has had a good run. Relatively cheap stock prices made it easy to trade billions of shares with limited capital. High volatility gave HFT algorithms a chance to dive in and out of the market constantly, chipping off fractions of pennies until they added up to substantial profits. But they may have partied just a little too hard, causing more damage than just the May 6 flash crash.