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 ," 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 ofvolume 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. 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 offor 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?