Oh boo hoo, now we have two people saying that high frequency trading is a problem for the market (1,2).

When JP Morgan discusses high frequency trading, people listen. When the head of JP Morgan’s algorithmic product desk Carl Carries says that high frequency trading is merely a form of parastic market making, people should run for the hills (not in the least due to JP Morgan’s proficiency in transforming theory to practice especially as it pertains to various daily trading patterns in the SPY).

Cry me a river will you! I consider myself an algo systems trader, as I write black box algorithms for clients. I do not consider myself a high frequency trader because I actually think it is a waste of time and effort. To me high frequency trading is a futile battle against technology. I know as I have watched developers write this code and constantly want to push the envelope. I have had traders ask the question; Could we run this code as a chip?

So if I think this is an unhealthy battle do I agree with zero hedge and JP Morgan? Not in the slightest! In fact I am disgusted by the comments because it tells me that when people take advantage of a certain ability and are good at it, then the looser on the other side of the coin cries and wants to take their ball home. Sorry, but this is the market and there is no concept of fair.

I will try and provide a balanced response to the bashing of high frequency trading. In specific I will address the bad points as pointed out by the guest blog entry.

1. HFTs provide low quality liquidity.

There is good and bad liquidity? Really? Or is it rather that there is good liquidity for those parties that benefit! To me there is no such thing as good or bad liquidity because the market is composed of a buyer and seller. And if in the past the liquidity provider was the one who had to suck up the bad liquidity then I say it was a rigged system that would have self-destructed anyways.

2. HFT volume can generate false trading signals.

Now this point I find absolutely hilarious! There is a false trading signal? I say only if you are on the wrong side of the trade. If you are on the right side of the trade then it is the right trading signal. I say there is no such thing as a right or wrong trading signal because a trading signal can be both good and bad, it just depends on which side of the trade you are on.

3. HFT computer servers are faster than other trading systems.

Oh cry me a river with your crocodile tears! There is nothing wrong with co-locating at the exchange or being as close as possible. The problem with this approach is that those that are not willing to invest into the infrastructure are going to be punished hard! This brings me back to my original point of why I am not willing to write high frequency trading programs as I know how expensive they are to maintain (though they are an algo programmers wet dream 😉 )

The problem that we face in the industry is that some high frequency trading programs are blowing major players out of the water and that hurts those players. In fact I am very very happy about this because I am sick and tired of the retail investor getting the short end of the stick. I want some big players to hurt a bit and understand what it feels like to be when you are getting punished.

This then brings me to the retail investor namely you or me. When the guest blogger tried to say that this is an issue for the retail investor it is a tenuous link at best. The link could be the institution that retail invests with (eg a fund), but my answer to that is that if you the institution are not doing your job to start off with then why on earth are you managing my money? Come on, you “institutions” get healthy pay cheques whether you perform or not, is it not about time that I hold you “institutions” accountable?

If however you as the retail investor are investing directly in the stock market then there is no effect on you unless you are day trading. Though then you are trader and not investor. A retail investor invests over a period of months and hence is not subject to the high frequency trading effect. The reason is because high frequency trading is a neutral game where it does not care if the price is going up or down over the long term. They just play around with the price as it moves. The biggest effect that a retail investor will have is the loss equal to a day’s volatility of the stock.

And it brings me back to a point I made in the past in March why were you not investing in the market? Because if you had you would have made a sweet profit, high frequency trading systems or not!