Asness Defends High-Frequency Trading

Apr 2 2014 | 10:52am ET

Friends of high-frequency trading are hard to find these days, but count AQR Capital Management’s Clifford Asness among them.

In a column in yesterday’s edition of The Wall Street Journal, Asness and AQR portfolio manager Michael Mendelson dismiss allegations—made most prominently and most recently by author Michael Lewis in his new book, Flash Boys—that there’s anything wrong with HFT. In fact, Asness and Mendelson argue, it doesn’t even put non-high-frequency traders like themselves at a disadvantage.

High-frequency trading “seems to have reduced our costs and may enable us to manage more investment dollars,” the two wrote. Noting that high-frequency traders have become major market-makers, Asness and Mendelson say that “on the whole high-frequency traders have lowered costs.”

On market-making, “high-frequency traders tend to do it best because their computers are much cheaper than expensive Wall Street traders, and competition forces them to pass most of the savings on to us investors,” they wrote. “That also explains why many old-school Wall Street traders hate them.”

Asness and Mendelson dismissed Lewis’ theory that HFT is fraudulent, stating plainly, “the stock market isn’t rigged and IEX”—the anti-HFT venture lauded by Lewis—“hasn’t yet generated a lot of interest.”

“The biggest concerns we have with modern markets is their complexity and the associated operation risks,” Asness and Mendelson argue.

“The good news has been that regulators began to focus on this potential problem last year. Unfortunately, the recent fusillade of hyperbole about HFT practices threatens to derail this effort and refocus attention where the problem isn’t.”


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