Thursday, August 30, 2012

The costs of HFT

High Frequency Trading (HFT) is stock market trading done entirely by computers.  Trades are sent in fractions of seconds whenever a mispricing or potential profit opportunity arises.

HFT has been criticized for causing dramatic market fluctuations, but this article argues that HFT should be a benefit to market participants because it ensures more efficient pricing.

I think that the problems attributed to HFT perhaps have more to do with computerized trading overall. If there's an error in the code, a computer algorithm can reap a lot of short term damage.   Case in point - Knight Capital... .  While in theory, HFT should result in more efficient markets, because of the magnitude and speed of the trades being executed, any mistake can blow up pretty quickly.