High frequency trading has emerged in last weeks as a debate issue after the publishing of the book “Flash boys” by Michael Lewis. The author defends that these machines rig the markets and modify the trading affecting negatively to investors. Let’s go step by step.
High frequency trading (HTF) is made by computers. They are programmed with complex algorithms to buy and sell taking advantage of milliseconds. They detect orders and operate before their execution to profit cents… multiplied by millions of shares.
The discussion goes around if this is completely legal. A study made by an American university asserts that regulatory proposals have “unclear definitions of HTF that fail to differentiate it from algorithmic trading and other technology driven markets”, but, on the contrary, there is little evidence “that a market failure exists requiring additional aggressive regulation of HFT”.
Are there any advantages? Supporters explain that HTF fuels liquidity in the markets and they are taking advantage of a spread between these millisecond price differences, something not new in the markets, which are always working with this spread to get benefits. On the other hand, critics point out that it means a price manipulation and machines have sometimes mistakes that causes big troubles as it did on May, the 6th, last year in New York, when the Dow Jones sank a 9% and companies as P&G lost a 31% in four minutes.
But what about you, small investor and T-Advisor subscriber? Experts agree that influence in little orders is very limited. HTF operates to take earnings from very big orders in very short-term (milliseconds), but the small investor has actually no perception with an order every month of, for instance, $10,000. However, they also defend a better regulation to control what is legal and not, avoiding loopholes in the laws.