The perils of high frequency trading

Business columnist Adele Ferguson stated that a report released in the US on Friday into high frequency trading (HFT) has set the cat among the pigeons in the global equities markets as it challenges a number of studies that say HFT cuts costs for investors.

The old-fashioned idea of an exchange as a physical place where people come together to buy or sell shares is long dead. So too is the definition of what constitutes long term. Trading technologies are making it possible to buy and sell shares in milliseconds – or even picoseconds, which is one trillionth of a second.

It has now become a technological race for relevance and survival. In the US more than 50 per cent of stockmarket volume is now based on high frequency trading, which involves trading shares in small parcels at speeds that are almost at the speed of light. In Australia, HFT is a relatively new phenomenon but some estimate that it accounts for more than 20 per cent of volume.

The report flies in the face of the typical argument that HFT reduces trading costs by making it easier for investors to buy and sell and it illustrates that costs initially fall as trading volumes rise but as average volume continues to rise, so do the costs and time to execute.

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