High Frequency Trading Doesn’t Matter

Wednesday, 14 Sep 2011 08:39 AM

By Michael Carr

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Several studies have shown that high frequency trading (HFT) might account for more than 70 percent of the daily volume in the stock market. Some market participants blame HFT for increased market volatility and some think every market decline is now caused by these firms.

The first point, that HFT firms account for almost three-fourths of market activity, is supported by data, but there isn’t really any documented proof that HFT has hurt the markets. On the contrary, they are actually liquidity providers and that can help small investors.

HFT firms are now associated with Wall Street and some investors will always blame the amorphous Wall Street for their losses.

In the old days, that included market makers who stood on the floor of the exchange and always took the other side of trades. For that service, they were paid at least 12.5 cents per share, which was the reason stocks traded in fractions like eighths.

New regulations got rid of fractions and market makers couldn’t survive when stocks traded with spreads of a penny or so. HFT firms filled that void and now serve in the role of the market maker, being paid to provide liquidity for the individual investor.

It is probably true that HFT firms sneak ahead of public orders and make a few cents on these trades. But the individual is now paying only a few cents per share to trade, much less than the minimum of 12.5 cents that existed just a few years ago.

For long-term investors, none of this matters.

If your holding period is months or years, HFT is helping you to get in the position for less money. Investors like Warren Buffett, who says his favorite holding period is forever, probably won’t deal with HFT by the time they sell since Wall Street will continue to evolve and will probably replace these computers with something else.

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