Forget HFT: The 4 Greatest Risks To Investors Now

The financial media discussions regarding high-frequency trading have reached a fevered pitch. No pun intended as the igniter of this public relations flame is famous author of “Money Ball” Michael Lewis who has been making the television circuit promoting his new book “Flash Boys.”

Heated public discourse about how the stock market is “rigged” by the high-frequency traders has caught the attention of the Justice Department. So, you’re telling me this is a new condition? Please.

Let’s provide some perspective to the argument.

First, the market is not your friend. It’s not the focal point for the pervasive inequality rhetoric circulating through politics and the media today.  It’s regulated to the point of sublime, so that’s not it, either. “Greed” and “fear” are the oils that run the machine. Some possess more oil than others. That’s how it works.

Get over it.

Since you’re going about your daily business working a job, trying to provide for your family, making it to the kids’ soccer games, let us expand on the impact of HFT on you.  High-frequency traders utilize powerful technological tools to rapid-fire trade securities. Sophisticated computer models seek to exploit penny differences in prices of stock long before you as a retail investor even hit the enter key to electronically purchase 100 shares of Coca Cola.

While many “experts” claim that HFT provides greater liquidity and transparency, the markets seemed to operate efficiently enough for the last 100+ years.  However, while technological advancements can be beneficial, they open the door to the many nefarious individuals which will choose to exploit it to their advantage by employing the following:

• Frontrunning: needs no explanation
• Subpennying: providing a “better” bid or offer in a fraction of a penny to force the underlying order to move up or down.
• Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
• Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
• Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
• Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.