Is High-Frequency Trading (HFT) A Fancy Term For Cheating?
Does It Hurt the Retail Investor?
What is important to most of the investing public is how HFT affects the retail investor. This is the person whose retirement savings are in the market, or the person who invests in the market in order to gain better returns than the near non-existent interest that comes from a savings account. Several economic studies have shed light on this question, some of which are detailed in an SEC report (found on this link: SEC Report)
A 2012 study conducted by economists Matthew Baron (Princeton University), Jonathan Brogaard (University of Washington) and Andrei Kirilenko (Commodity Futures Trading Commission) focused on the S&P 500 e-mini contracts. The researchers found that high-frequency traders made an average profit of $1.92 for every contract traded with large institutional investors and an average of $3.49 when they traded with retail investors. This allowed the most aggressive high-speed trader to make an average daily profit of $45,267 according to the data gathered in 2010. The paper concluded that these profits were at the expense of other traders and this may cause traders to leave the futures market.
Although the authors did not study the equity markets where high-frequency traders account for a large amount of stock trading volume - possibly 70% or more, according to some reports - they say it is likely that they would reach the same conclusions.
Because of the relative newness of HFT, the process of regulation has come slowly, but one thing that does appear to be true is that HFT is not helping the small trader.
Tim Parker can be contacted at BuildMyKingdom