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Editor’s Letter: February 2014

Editor’s Letter: February 2014

High Frequency Trading – Friend or Foe?

The conventional wisdom on high-frequency trading is that it hurts no one and in fact makes market more liquid. Retail investors therefore benefit from the algorithm-driven, split-second trades that make up more than half of the activity on a given exchange. Trading costs are lower.

So why is the HFT industry getting defensive? FINRA took up the issue in its 2014 letter of regulatory priorities, saying it is “concerned” about such things as “momentum-ignition strategies” and “spoofing,” where computers flood the exchange with orders on one side of a trade to influence the price, then back out and profit from participating in the other side. Squeezing fractional pennies billions of times over, in the blink of an eye. FINRA vows to continue to “observe” the issue.

When any industry’s self-regulating body steps into a debate, a cynic might think they are merely providing cover so outside regulators don’t have an easy excuse to come crashing into the business. We’ll assume that FINRA realizes the long-term damage that comes from the loss of investor trust in the wake of HFT-inspired market meltdowns and stories of abuse and take on the transgressors. Time will tell.

But the industry itself is circling the wagons closer to home too. In the past month four of the largest HFT firms started a lobbying group, Modern Markets Initiative, led by former political strategists for Barack Obama and Mitt Romney. The objective? To confirm that HFT benefits all market participants. It’s like saying “hey, we’re really doing all this for you, retail investor. If we happen to make a little extra money on the side, all the better.” To me, that’s the wrong strategy. Wall Street is a zero-sum game. When someone wins, someone else loses. To claim otherwise might work among Washington D.C. reputation consultants and policy makers, but retail investors are smarter than that.

The technology and people that can enable HFT and other algorithmic-based strategies will always outrun regulators’ attempts to control them. And perhaps it should. Maybe the lobbyists should point out that yes, HFT makes gazillions of dollars for the traders that run the strategies. But the retail investor doesn’t lose. It’s the old-school trading firms that will get the stick. HFT still creates better pricing than when on-the-floor traders were shouting into landline phones. Does anyone argue that was more efficient?

A rebuttal on last month’s letter: Lewis Walker, from Walker Capital Management in Peachtree Corners, GA, took issue with last month’s editorial letter “How Can You Give Advice About What You Don’t Understand,” questioning whether developments in finance, like Bitcoin or peer-to-peer lending platforms were outrunning advisors ability to give sound counsel to clients. What really stands in the way is “advisor liability and aggressive regulators and plaintiff lawyers,” Walker writes. The regulatory environment could make any advice he gives here a costly endeavor, A point well made, and well taken.

Due to a production error, our list of top independent brokers under 40 in last month’s issue contained inaccuracies. The correct list can be found at our website As always, I welcome your questions, comments and suggestions, good and bad.



David Armstrong




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