High Frequency Trading (HFT)

"You stop sending me information, and you start getting me some."
--Gordon Gekko (Wall Street)

A new book by Michael Lewis, Flash Boys, along with a 60 Minutes interview with Lewis last Sunday, has suddenly elevated public awareness of high frequency trading. As usual, the public is behind the curve. HFT is not exactly new.

We have discussed HFT (a.k.a. 'algos,' 'black boxes') several times on these pages, including this missive that considers the central problem at hand: the commingling of market making and prop trading on for-profit exchanges that count HFTs among their largest revenue producers.

It is tempting to reach for regulatory solutions. Some have proposed banning the fragmented for-profit exchange network in favor of the old model of a few mutually-owned public exchanges. Charles Schwab and others favor laws that penalize quote stuffing, ban exchange selling of preferential data feeds, and eliminate order types that promote front running.

Another solution is for investors to vote with their feet. If you do not like exchange practices that put you at a disadvantage, then don't play in that arena. Pull your business from exchanges that tilt the playing field.

Entrepreneurs will be motivated to meet the needs of those investors by developing alternative exchanges--ones that are free of biases that currently infect the system.

Instead of force, try freedom. Lower the guns, and encourage people to peacefully decide how they want to trade.