Weekend Wars: Traders vs. Funds

10/4. To military and police personnel, an affirmative acknowledgment. To investors and traders, the potential boiling point of a slow simmering feud. On this date, several high powered mutual-fund executives will convene at the Investment Company Institute in Washington D.C. and reportedly begin a push to shackle high-frequency traders .

A bit under two years ago I sat down with a few Chicago options traders. Most were joyous of the paydays they were seeing as a result of the panic. One elderly gent, had a whole different take on the situation, however. Here's what he had to say:

What it's gonna come down to is somebody's gonna have to pay all this back in blood. They're not gonna stop until they have their bad guys hanging from the gallows. It's you boys, the ones that played it smart... when the dilettantes were playing craps. You are the ones they're gonna come after.

Mind you, the gentleman in question is a true old time trader. In fact, he's the sort of person who fondly references Fisher Black and Myron Scholes as "those kids that made it about the numbers".

His voice, however, does speak for a silent but powerful minority. They are the modern day hunters and gatherers, the rebels with a very distinct cause. Wrapped up and packed up in bland offices, hidden behind bespectacled exteriors, with controlled expressions and reserved demeanors.

The alphas of our time. The market shakers.

On the other side, we have the large institutional funds. The market makers (and movers).

Representing the interests of pension funds, unions and individual investors, these fiscal behemoths pack an enormous punch, but are very slow and sluggish. Often their ability to move in and out of positions can be hampered, affected, even ruined by garrisons of smaller, quicker, "rogues".

Their side of the argument is that high-frequency traders have an unfair advantage and are able to pick-off loose fragments of data leakage and use them for personal gain.

This side also alleges that such scenarios directly favor the short-term trader over the long-term investor and have a negative effect on the financial picture.

We have certainly heard quite a bit about "speculators ruining the economy" over the past two years.

Is this true? Or is this another scary case of a repetitive lie mutating into the truth?

The speculator is the life blood of any market based system, whether we are talking about a swap-meet in the Third World or a high-frequency market on Wall Street or off Wacker Drive.

Risk and return are two sides of the same coin. One doesn't exist without the other. High frequency traders have long been whispered about as the real culprit in waiting, it seems as though the curtain is ready to go up on the latest act of our play...