The Speed Traders’ Edgar Perez to CNBC’s Oriel Morrison, Criticism of High-Frequency Trading Phenomenon Unfair
Edgar Perez, author, The Speed Traders: An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World, explained in detail the role high-frequency trading has been playing in the equity markets to CNBC Cash Flow’s Oriel Morrison; the interview is available on CNBC’s website at http://video.cnbc.com/gallery/?video=2023403523. High-frequency trading, in which computers may buy and sell thousands of shares in fractions of a second, had come under criticism after the Dow Jones Industrial Average lost almost 1,000 points intraday on May 6, 2010, before recovering just as quickly.
Mr. Perez described high-frequency trading as the natural progression of technology applied to the investing and trading worlds. In the process, high-frequency trading has certainly unmasked structural issues in the U.S. equity markets that are currently being examined by legislators and regulators in an effort to further strengthen financial markets. He indicated that, on balance, the impact of high-frequency trading is positive for all other market participants thanks to the increased liquidity it provides to retail and institutional investors.
High-frequency traders replace traditional specialists in providing liquidity in a much more competitive frame work. Liquid and efficient capital markets are extremely important for economic development. While some feel that high-frequency traders spending millions of dollars on infrastructure to be a few microseconds faster than the other guy, is somehow, from a social perspective, not money “well spent”, it can be argued that this is just the way that competitive markets find equilibrium.
As expressed by Stuart Theakston, Head of Quantitative Research and Automated Trading with GLC and one of the practitioners featured in The Speed Traders, high-frequency trading has all the attributes required to make a perfect scapegoat:
- It is hard to understand, or at least, it takes a bit of effort to understand (even professional long-only institutional investors have difficulty understanding it)
- It is fairly exclusive, as the firms involved, either have no incentive to talk about what they do (because they are proprietary trading firms and don’t need to attract external capital), or are not allowed to (because they are hedge funds and have regulatory constraints on marketing themselves)
- It employs individual participants having very high levels of academic qualifications, mostly PhDs
- It has some large dollar numbers associated with it (though more in terms of turnover than profitability, as further detailed in The Speed Traders)
- It has lots of terminology associated with it that sounds geeky and confusing to the uninitiated: ‘microsecond’, ‘co-location’, ‘momentum ignition’, ‘temporal arbitrage’ etc.
- Some intelligent, well informed and eminently quotable people are railing against it (Mario Gabelli, Paul Wilmott, Richard Bookstaber, among others)
- It is prone to occasionally be a contributory factor (or, in fact, its switching off was a contributory factor) to events perceivable by the public, like the “flash-crash”
The Speed Traders, http://www.TheSpeedTraders.com, published by McGraw-Hill Inc., is the most comprehensive, revealing work available on the most important development in trading in generations. High-frequency trading will no doubt play an ever larger role as computer technology advances and the global exchanges embrace fast electronic access. The Speed Traders explains everything there is to know about how today’s high-frequency traders make millions—one cent at a time.”