Study: High Frequency Trading Screws Everyone (NYX, NDAQ)

It looks look your fears that high frequency trading (HFT) screwing up the markets are correct.  We have often wondered how this benefits anyone other than the HFTs and the exchanges.  Most individuals and small institutions do not have anywhere the infrastructure like the HFTs have.  These can get closer to the NYSE and to the NASDAQ, literally, and in many cases they have significant advantages that Joe Public does not have.

It turns out that the bulk of financial institutions are at a disadvantage as well.  An outfit called Liquidnet, an institutional marketplace, noted that about two-thirds of institutions are worried about HFT, led by global firms and in the U.S. and in Europe.

Liquidnet conducted a Institutional Voice Survey that polled 630 institutional asset management firms in its contact list, which are said to manage a sum of more than $13 trillion and who have about 70% of the assets managed in the United States.  This year’s data is based upon more than 300 responses.  The results: “strong conviction among the vast majority of long-only traders that HFT is a negative for institutional investors trading in large size…”

Liquidnet went on to say that investors are “clearly concerned that their long-term investment styles are at odds with the speculative, nano-second profit taking approach utilized by high frequency traders.”

As far as more detailed figures, Aite Group and Tabb Group gave studies saying “almost 75 percent of overall daily equities trading can be attributed to high frequency trading.”  In short, the machines and programs are just buying and selling shares back and forth to each other all day long.

The results showed that (at the top five global institutions) there were 73% of the traders who regarded HFT as a high-priority market-structure issue.  North American traders were at two-thirds concerned, while 60% of European respondents were concerned, and more than 50% of Asia Pacific traders were concerned.

At the beginning of the summer we talked about the new angle of trading stocks in one-billionth of a second.  That was the nanosecond trading.  The flipside is the market risks: imagine if one billion orders came to the market in a second.  The only good news is that the odds that you could ever see that take place would take too much money.

If you are Joe Retail, you have no chance at fighting these HFTs.  They get to execute ahead of you, they get to trade sub-penny (try turning in an order with a decimal of less than a penny – like $23.143 – and see what happens), and they have been able to do flash trades in the past.

The only good news we have ever really been able to come up with in a market where there is this much computerized trading is that at least in times of difficulty a retail investor can be assured that there is a better chance that there will be a bid or ask out there in more active stocks.

If Liquidnet is right, now it is not just Joe Retail who is worried about the impact of the markets under the wave of HFTs.

Just do not ask NYSE Euronext, Inc. (NYSE: NYX) nor Nasdaq OMX Group Inc. (NASDAQ: NDAQ) to come to your aid.  If there is really anywhere close to 75% of the trades coming from HFT, they are loving that these entities exist.  Imagine what might happen to share trading volume if these HFTs disappeared.  THat wouldn’t be good for the NYSE nor for NASDAQ.

Follow the money…

JON C. OGG