There is a continuing debate raging in the blogosphere about high frequency trading, and whether it helps or hinders the markets.
There are some good arguments both for and against high frequency trading. Leading the charge on behalf of the supporters is Cameron Smith, who is General Counsel of Quantlab Financial. The detractors have many champions, including Senator Ted Kaufman and an influential blogger by the name of Sal Arnuk, who is one of the partners of Themis Trading.
In a recent post on the Traders Magazine website, Smith presented a very robust defence of high frequency trading (HFT), pointing out a number of ways in which it helps the market overall. Smith argued that high frequency traders add liquidity to the market, that HFT aids transparency and price discovery, that HFT lowers transaction costs, that it is nothing more than an evolution of market making and that on the whole, it leads to a more efficient market that is to the benefit of all.
Arnuk on the other hand refutes all of those points and in a recent blog post, addressed each of Smith’s arguments one by one.
There is a good analysis of the debate over at www.highfrequencytradingreview.com, so if you want a balanced assessment, go and check out that site first, which links to the original articles.
Whichever side of the fence you are on, there are certainly some good points to be made both in favor of and against high frequency trading. Whether it is here to stay or whether it gets regulated out of existence in the coming months or years is anyone’s guess. Senator Kaufman is doing what he can to bring about such regulation and the SEC are now analyzing the results of a recent consultation paper on the topic.
It will be interesting to see what happens in this space and how the markets are affected by the outcome.