High-Frequency Trading Doesn’t Need Speed Limits, It Needs A Better Image

Oct 7 2009 | 11:16am ET

By Graham Miller – High-frequency trading (HFT) could use a good image consultant.  Everyone from Floyd Norris to Chuck Schumer (D-NY) have questioned the validity and even legality of high-frequency strategies, as they have taken over from exchange floor specialists as the mainstream media’s favorite whipping boy. 

Unfortunately, HFT is a term like “salad” where there are many definitions, and no one covers the entire set.  We define HFT as high-speed, high-volume, low-latency trading enabled by technology. It’s what the Marketcetera platform enables and it’s all about responding quickly to inefficiencies in the market.

It’s also unfortunate that the media have helped conflate HFT with a couple of other trends that have given it a bad name. The practice of flash orders — for example, giving order floor access to a limited number of market participants, which I would argue isn’t good for the market structure — is being twisted up with HFT in some news stories, coloring it an unfair advantage.  It’s true the same technology can enable HFT and trading flash orders, but the two are not equivalent.  There are many high-frequency strategies that operate outside the limited number of venues providing flash orders.

A second issue conflated with HFT in recent discussions is the apparently large profits generated by banks that a) have taken TARP funds, and b) have produced significant returns based on HFT.  HFT has been identified as a government-funded unfair advantage that the big banks have over the individual investor.

I don’t buy it.

Whenever inefficiencies can be removed, it’s constructive to the market. That to me is a fundamental principle of capital markets. And while it’s true that the larger banks are more likely to have the technology budgets to develop the infrastructure to support HFT, the playing field is leveling quickly.

Bear with me for a marketing message: because Marketcetera’s trading platform is open source, it is cheap, fast and flexible. Our new offering in partnership with NYSE will provide a managed service version of the Marketcetera platform right there in the exchange’s data center, allowing for the same kind of low-latency trading that the big banks, who have paid to park their servers their too, have to build strategies.

The point is, technology is evolving and Wall Street is changing. HFT is no longer going to be a tool for the elite few. The analogy we like to use is the racetrack where all drivers have the same car. Once the advantage of the machine is removed, the best driver wins.

Graham Miller, founder of Marketcetera, has over 10 years of experience in the finance and software industries, most recently serving as the director of electronic trading strategies at a hedge fund in New York City. Prior to that, Graham worked for Jane Street Capital, making markets in equity options on the floor of the American Stock Exchange and directing electronic trading efforts. During his tenure on Wall Street, Graham oversaw the development of several high-throughput black box trading systems for equities, options, ETFs and futures. Before joining Jane Street Capital, he assisted in the development of several products and companies at Reactivity, a software incubator turned network security company, which was acquired by Cisco in 2007.

To read more of Graham's articles, visit The Marketcetera Platform Blog.

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