High Frequency Trading…Manipulation or Not?


Welcome to CrushTheStreet.com’s Weekly Market
Wrapup! Let’s get started in the equities sector,
which saw red amidst speculation of job growth concerns and rising food prices potentially
hindering a tepid consumer confidence trend. The benchmark S&P 500 index closed at 1,888
points, down a tenth of a percent while the Dow Jones ended at parity against the prior
session. The biggest loser by far was the NASDAQ composite index, dropping nearly a
full percent and giving up most of its gains from earlier in the week.
Before the opening bell rang on Monday morning, Wall Street was already abuzz surrounding
the controversial and extremely divisive issue of high-frequency trading, which entered into
the investors’ lexicon once again due to the well-publicized 60 Minutes interview with
Michael Lewis, author of the new book, “Flash Boys.” In what can only be described as a
market hit piece, Mr. Lewis denounced the equities sector as rigged, claiming that high-frequency
trading is used by powerful investment firms and banks, including the exchanges themselves,
to gain an insurmountable advantage over the commoners.
“High frequency traders, big wall street firms and stock exchanges have spent billions to
gain an advantage of a millisecond for themselves and their customers. Just to get a peek at
stock market prices and orders a flash before everyone else; along with the opportunity
to act on it.” Michael Lewis: “The insiders are able to move
faster than you. They’re able to see your order and play it against other orders in
ways you don’t understand.” The problem, however, is that the mere existence
of high-frequency trading does not definitely prove market manipulation. At its core, the
definition of HFT is the use of algorithms to make trades based on a given set of logical
functions. Since these complex algorithms require advanced computer technology, the
process by default is incredibly quick, often accomplishing in minutes tasks that would
take a human trader several hours to perform. The distinction is important to remember because
it’s not the tail that wags the dog : in other words, the ability to make fast trades is
not immoral, nor is it illegal. Further, it would be extraordinarily difficult to police
such technology and it would reek of hypocrisy. The advent of the internet has allowed for
digital trading to be the norm and the trajectory of the markets, whether you like it or not,
is towards increased digitization and less human interaction.
Of course, some of the critics of HFT will cite commodities manipulation as one of the
dubious “beneficiaries” of the Algorithm Era, with the precious metals complex taking another
hit on Thursday due to technical selling pressure off the backs of a stronger U.S. dollar index.
Gold came off slightly from the prior session, down a quarter of a percent, while silver
received an inordinate blow, losing eight-tenths of a percent. However, the platinum group
metals have performed relatively well this year and bucked the trend this week, posting
modest gains. And that will do it for this edition. Thanks
for watching, and we’ll see you next week!

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