High Frequency Traders

Posted by Jeff Carter
on August 25th, 2010

HIgh Frequency Traders (HFT) are getting a lot of scrutiny these days. Wall Street is looking for someone to hang the blame of the flash crash onto. HFT guys are a good target. Many are based in Chicago. They also have eaten into some plush business NYC used to dominate.

For the general public, which includes a lot of the business press, most don’t understand the market. They parrot what ever some talking head says without doing some real dirty fingernail work. (Charlie Gasparino of Fox Business and Jeremy Grant of FT.com do a good job of getting their hands dirty. John Lothian also has spent a lot of time in the trenches.)

HFT guys were not the cause of the flash crash.

Cannot say that enough. If they were, then the emini S+P would have had a wider bid/ask spread all the way up and down. Instead, the spread was a normal tick wide.

Today’s Financial Times has an article assailing HFT trading. It’s analysis is off base. It assumes that HFT traders will simply sop up selling pressure when markets go down. It also assumes HFT people are the “wild west” of trading.

What is the “wild west” of trading is a lot of the way the market is structured. HFT traders are not any different than any other trader. They use every bit of their energy to try and maximize their gain. That is what a market is supposed to be about. Every participant competes to maximize their own profit. This contributes to a transparent price, which influences supply and demand. Coase works. Let parties bargain without transaction costs, assigned property rights and what ever they decide independently is best for the macroeconomy.

HFT traders are not a lot different than the old “local traders” that sat around trading pits and traded their own money. When the market went crazy, sometimes they put their hands in their pockets and watched. No one can compel any market participant to participate in a market when they don’t want to.

The NYC banks don’t want to see structures of the marketplace change. They wrote the rules and now are reaping the benefits of them. Since the government propped them up, they have gotten bigger, more dominant, and now want to extend their gains.

Main Street loses.

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