Feature

Issue of the week: Do high-speed traders rig the market?

Wall Street is abuzz over high-frequency trading.

Wall Street is abuzz over high-frequency trading, said Matthew Philips in Businessweek.com. Ever since Michael Lewis went on 60 Minutes to promote his new book, Flash Boys, and “accuse high-frequency traders of rigging the stock market,” the debate “over HFT’s merits and evils” has been hard to avoid. But all the chatter clouds the big issue: Is high-frequency trading in fact insider trading? Critics say yes, since the practice allows those traders to “get better information faster than the rest of the market”—often by nanoseconds—thanks to tactics such as physically placing their computer servers closer to exchanges or paying exchanges for proprietary data feeds. This is legal because, by law, prices must be entered into the exchanges’ public data feed (called the securities information processor, or SIP) and the proprietary feeds at the same time. “But once data leaves the exchanges, the proprietary systems often process and transmit the information faster,” giving added leverage to high-speed traders.

The government, apparently, thinks this is unfair, said Charles Gasparino in the New York Post. The U.S. attorney in New York, the FBI, and the Securities and Exchange Commission are all investigating high-frequency traders, on the suspicion that they rip off individual investors by eclipsing their orders “at the speed of light,” thereby forcing them to pay more for stocks than they would have “if the high-speed computer never existed.” But the only orders HFTs are cutting the line on are for the big Wall Street firms. Until high-speed trading came along, money managers and their clients at places like Blackrock “could hide their orders, and trade without alerting the rest of the markets.” High-speed trading has made the system more transparent, and “any rip-off here is of the rich, by the rich.” For the average investor, “whatever game they’re playing might be a net plus,” since HFTs have lowered trading costs for everyone in the market.

Sure, “Wall Street is rigged,” but so what? said Bill Saporito in Time.com. These days, “most brokers have ‘best execution’ requirements, meaning that civilians get the same price as the pros” no matter what. And “while the HFTs may be investing in microseconds, the rest of us should be investing in years.” Financial planners still say that index funds are the best option for ordinary investors, since they beat 90 percent of managed funds over time. To try to buy and sell stocks in competition with HFTs “armed with supercomputers and algorithms is like bringing a peashooter to an artillery battle.” But for long-term investors, they’re not an issue.

Still, HFTs clearly need more regulation, said Cameron Smith and Haim Bodek in the Financial Times. Regulators could start by making market data free and ensuring that public and proprietary feeds are synchronized, thus “eliminating the perception of unfairness.” They should also ban “dark pools,’’ the off-exchange trading venues that make the market more opaque. Computerized trading is inevitable in the 21st century, but to make the market fairer, we must “simplify the operation.”

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