Article: The Social Uselessness of High Frequency Trading (HFT)

While working on my free weekly Newsletter number to be issued tomorrow I came across the following brief note and I though it would be good to share it with you.

The debate surrounding high frequency trading has become increasingly heated, reflecting the varied perspectives on the ability (and desirability) of high frequency traders to move faster (and on the basis of potentially greater information) than other traders. Paul Krugman represents the contrarian view of high frequency trading:
“It’s hard to imagine a better illustration (of social uselessness) than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money. But it’s hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function… we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those that make us poorer.

High frequency traders generally use proprietary data feeds to get information on the state of the market as quickly as possible. In the U.S., this means that such traders receive information before it is delivered over the consolidated tape, raising issues of fairness and potential harmful effects on the cost of capital.

Sources:  New York Times, August 2, 2009; Securities and Exchange Commission, 2010, Concept Release on Equity Market Structure, Release No. 34‐61458; File No. S7‐02‐10, page 45.

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