In High-frequency Trading, Millisecond are Worth Fortune

The Speed Traders Workshop 2012, How High Frequency Traders Leverage Profitable Strategies to Find Alpha in Equities, Options, Futures and FXRegulators all over the world are undertaking intensive studies to see how markets are being influenced by high-frequency trading. “High-frequency traders can see things a millisecond ahead of the rest of us, but a millisecond is worth a fortune,” says Eric Kirzner, a professor at the University of Toronto’s Rotman School of Management who also holds the John H. Watson chair in value investing. “They can see what slow-moving traders are doing and move ahead of them.”

“This is sort of a ‘tragedy of the commons’ situation where the high-frequency traders have found a way to exploit the market in the short run, but run the risk in the long run of spoiling the markets for everyone,” says David Baskin, president of Baskin Financial Services Inc. in Toronto, an unabashed critic of the practice.

Proponents of high-frequency trading say they are doing nothing wrong, and their speed is actually helping the markets by improving liquidity. Increased liquidity can ease the buying and selling of securities, reduce bid-asked spreads, lower trading costs and improve price discovery.

Opponents cite increased volatility in the markets, which makes pricing less efficient, as well as the erosion of investor confidence – especially because of a few unsettling, extreme events in which high-frequency trading played a role. One of those occurred in August, when Knight Capital Group Inc. lost $440-million (U.S.) after an upgrade to its computerized trading system went awry, causing share prices on the New York Stock Exchange to fluctuate wildly after Knight put out a huge number of buy and sell orders.

“The problem is, nobody knows for sure who is right,” Prof. Kirzner says. “There’s all kinds of anecdotal stuff out there, but real research hasn’t been done yet.”

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