Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading, 2nd Edition

CHAPTER 16

Controversy Regarding High-Frequency Trading

The major advances in speed of communication and ability to interact took place more than a century ago. The shift from sailing ships to telegraph was far more radical than that from telephone to email!

—Noam Chomsky

As we described at the beginning of Part Four, HFT came into the public's consciousness through controversies surrounding it. Most of the arguments against HFT strike me as being arguments made by people who are either ignorant of the facts or motivated by self-interest to present biased and flawed information to the public. The kinds of criticisms generally ignore the differences between the various types of HFTs, confuse various elements of market structure with the practice of HFT, and conflate high-speed trading (and, often, quant trading in general) with HFT.

The criticisms of HFT seem to gravitate around four major ideas. According to detractors, HFT:

1. Represents unfair competition, creating a two-tiered system of haves and have-nots.

2. Manipulates markets and/or engages in front-running other investors.

3. Causes structural instability and/or creates additional volatility in markets.

4. Has no social value.

We will address each of these arguments in order, with the primary goal of separating fact from fiction.

DOES HFT CREATE UNFAIR COMPETITION?

In 2009, Andrew Brooks, head of U.S. equity trading for T. Rowe Price, said, “But we're moving toward a two-tiered marketplace of the high-frequency arbitrage ...