High-frequency trading: Clear and present danger?


The advances of the modern age have levelled the playing field just about everywhere except for the individual investor in the modern capital markets. How can Ma and Pa Investor compete against Goldman Sachs, Morgan Stanley or a hedge fund that relies on high-frequency trading (HFT)?

One congressman wants to make things more fair and might take down HFT to reach that goal. And CIOs and their technology staff will have to implement these new rules if they are ever passed.

In a recent letter sent to the SEC, Congressman Ed Markey (D-MA)  wrote that, "…sophisticated trading firms can make full use of light speed HFT algorithms, while the ordinary investor day-trading his 401k remains at more terrestrial speeds…There is a real risk that algorithmic trading is making investors hesitant to re-enter the equity markets because they fear that the entire game is rigged."

Markey calls HFT a threat to the stability and safety of U.S. markets and proposes that, "… its use should be curtailed immediately."  

People in the HFT space agree that high-speed trading favors the fast, but they have their concerns about an HFT ban. Seth Merrin, CEO of Liquidnet, the global trading network, says that "the market has done very well over the last three years but we are still seeing massive outflows up until the first week of this year."  

According to Trim Tabs, outflows from U.S. equity mutual funds in 2008 reached a record $148 billion. In 2009, confidence appeared to be stabilizing as outflows from U.S. equity mutual funds totaled just $28 billion.  

Trim Tabs COO Minyi Chen tells Fox Business News, "High frequency trading undermines investor confidence and they (investors) want other types of investment vehicles that offer higher liquidity than mutual funds -- for example ETFs."   

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