An Accident Waiting To Happen

By Paul Amery from Index Universe

Is the intraday tradability of ETFs a blessing or a curse?

My colleague Paul Britt’s blog has generated an interesting debate on the pros and cons of high-frequency trading.

Britt refers to the dangers of placing a market order—that is, an order to buy or sell a security, say an exchange-traded fund or share—at the best prevailing bid or offer price, when it’s possible that the true market lies elsewhere. Nothing to worry about, says a poster called Kid Dynamite, commenting on the blog. Such “concealed” orders may well be within the published market spread, allowing even better execution. Another commenter, Vance Harwood, is more concerned, referring darkly to the “many bad things” that can happen if you trade “at market”.

Britt surely has a point in arguing that an exchange on which 98 percent of orders are cancelled before execution resembles a gigantic game of bluff more than a real marketplace. No-one can dispute that headline bid-offer spreads have declined markedly since the proliferation of automated trading, to the apparent benefit of all. At the same time, the 2010 “flash crash” also left no doubt about the inherent weaknesses of large, unsupervised, complex networks of interconnected computers. As Britt points out, mini-flash crashes, such as the recent one in Apple shares, continue to occur.

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