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According to this article, a new study by the chief economist at the Commodity Futures Trading Commission concludes that high speed trades hurt investors. Andrei Kirilenko (no relation to the basketball player) claims that high-frequency traders are "really the new middleman in exchange trading," and that the rapidly increasing speed and automation of the financial markets may pose a threat to the stability of the overall financial system. He says that the markets are a zero-sum game, where high speed profits are derived at the expense of traditional traders and investors. Some of the numbers do prove threatening:

The researchers found that more aggressive traders accounted for the largest share of trading volume and made the biggest profits. The most aggressive scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract.

Though Kirilenko's work focused on one specific corner of the markets, regulators see high speed traders moving into a wider range of areas, including bond and foreign currency trading. The biggest investors can trade thousands of contracts at once and the average aggressive high-speed trader made a daily profit of $45,267 in a month in 2010.

Critics of Kirilenko's work claim that his research focused on profits and neglected the benefits of high speed traders, such as the lower cost of trading for regular investors. However, given limited data, it is difficult to decide whether the benefits would outweigh the costs.

What do you guys think? Based on your experience, are high speed trades hurting traditional investors?

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Comments (11)

  • dzar's picture

    I could see how HFT could be hurting day traders, but I'm not sure if the argument holds up for investors -- intra-day price movements should not have an effect on longer-term horizons.

  • EURCHF parity's picture

    Does automating the driving of metro trains hurt train drivers? Sure. But the net value add to anybody not a train driver is fairly high, especially in a country with an illiquid train driving labour market (read: London, Paris, etc. anywhere frequently paralyzed by bastards paid over 140k/year who want another 5% raise for accelerating and braking repeatedly)

    The "traditional" market makers will bemoan the loss of an easy way to make cash. The more interesting question is: are markets more efficient as a result? Or do feedback loops screw with the pricing process, aside from the odd glitch? You will often hear an institutional complaining that these days, the price has moved 2 bucks before his trade has finished being executed, whereas in the good ol' days, he could dump 5x the amount of stock on the market with no noticeable immediate effect. Clearly this is annoying for the institutional, but is it a bad thing for everybody who wanted to buy this stock during this time frame? Is the net value add really that negative?

    The problem with many changes is that the minority with the former comfortable oligopoly is small, but vocal, whilst the large number of people who are gaining a small benefit from an improvement deriving from the slaughter of aforementioned minority's privileges don't think it a sufficient reason to raise their voice (especially if they have their own oligopolies to mind).

  • In reply to EURCHF parity
    GoodBread's picture

    EURCHF parity:
    (read: London, Paris, etc. anywhere frequently paralyzed by bastards paid over 140k/year who want another 5% raise for accelerating and braking repeatedly)

    Their salary is half that at the very most in Paris.

    There have been a lot of studies on the costs of HFT and recent research has shown that speeds are getting so high as to impose absurd costs on the exchanges to keep up, which is probably part of the reason why the issue is getting a little more pull in political circles now. (For said research, it was featured on the trader.se, which covers the issue quite frequently). I think the current system is far better than the specialist system we had but things are being pushed too far at times.

  • In reply to GoodBread
    EURCHF parity's picture

    EURCHF parity:
    (read: London, Paris, etc. anywhere frequently paralyzed by bastards paid over 140k/year who want another 5% raise for accelerating and braking repeatedly)

    Their salary is half that at the very most in Paris.

    London is 60k GBP, close enough in SGD (fair enough that in USD it's lower), and equivalent to a mid-level management role in a non-finance industry. Paris is 2-3k EUR a month, which for that city is "pretty good" (which says more about the French employment market) esp with 100+ "rest days" and 28 days leave. In both cases the rate is way above what it should be for unskilled labour easily automated.

  • Going Concern's picture

    1) HFT is basically market manipulation at its finest. You have all these programs that throw out 'fake' bids...they're fake because as soon as the market has gone up a little because of these bids, they're withdrawn before they can be scooped up. All within milliseconds. Yeah, that sounds like you're creating a ton of liquidity.

    2) HFT is great because it helps to weed out all the bros who think that they can squeeze out profit from flights of emotion-driven lunacy known as technicals, headlines, obvious data releases, basically any short term market aberrations stemming from non-fundamental reasons, etc. We need more decent honest long term investors, not a bunch of button-clicking opportunists.

    "He who fights with monsters should be careful lest he thereby become a monster. And if thou gaze long into an abyss, the abyss will also gaze into thee."

    "Life is infinitely stranger than anything which the mind of man could invent."

  • lbreitst's picture

    I'm surprised nobody has raised this point yet:

    What traditional mom and pop investor trades S&P futures contracts!?!?!?

    99.99% of retail investors can't tell you the difference between algorithmic trading, high frequency trading, and electronic trading. Despite how much CNBC wants to say that HFT is why retail investors are on the sidelines, the argument is bullshit and not founded on any facts. Give me one study or any type of evidence citing how traditional retail investors are being cheated by algos.

  • IlliniProgrammer's picture

    I think HFT takes legitimate liquidity out of the markets, but not in the way that the CFTC's study suggests. The CFTC needs to understand that people trade because they are in the business of trying to make money. If providing liquidity were a losing proposition, the HFT shops would close up shop.

    I don't think scalping is good for investors. That's not what this study seems to look at.

  • eurokopek's picture

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