High Frequency Trading – Still Contentious

TradeTech last week in New York was one of the best yet. David Leinweber started off the proceedings at the not-so-subway-accessible Javits Center, and if you haven’t seen David’s talk about his research at the Lawrence Livermore National Laboratory (yes, where they design bombs), you should see him the first opportunity you have. His examinations of news- and sentiment-based trading strategies are as fascinating as they are valuable.

Several of the sessions incorporated audience polling, and one of the questions piqued my interest: What is the best way to manage high-frequency trading (HFT)?

• a/ Minimum quote duration rules

  b/ Cancel fees

  c/ Both

  d/ Neither

At first I questioned why we’d need to manage high-frequency trading. ”What has it done now?”I wondered.

HFT seems to be a perennial bogeyman. One of the most common questions I’m asked when traveling in Asia is what I think of HFT. But here in the world’s most financially sophisticated city, I would have thought the last discussion of HFT’s morality took place in 2008.

So, I punched in my answer (D) and waited for the results. To my surprise, HFT still seems to be contentious (see graph).

While my answer came in second, 75 percent of respondents in Manhattan thought something needs to be done about HFT. I understand the arguments for further action, but I didn’t think that anybody cared any longer.

Given the chance to re-vote without option D, I would opt for using cancel fees (B) to manage high-frequency trading. Exchanges could set cancel fees at a very low level, keeping things relatively painless for the trader who cancels an order once every six months or so, but stinging the most aggressive of HFT players, who cancel orders many times a day.

But what I really want for you to take away from this post is to see David Leinweber. And buy his book Nerds on Wall Street; reading it is much easier than getting from the subway to the Javits Center.