High frequency trading debate continues
High frequency trading continues to get a run in the mainstream media, with 'Debunking myths about high-frequency trading', in this week's Sydney Morning Herald, coming to its defense. In particular, the article seeks to debunk the 'myth' that HFT is legalised front running, a suggestion made by a number of commentators (including myself).
The author claims that HFT can't be front running because HFTers don't have clients. This may be the legal, or traditional, definition of front running but the argument is not that HFTers are getting away with an illegal activity, but simply that HFT is 'in essence' front running and questioning whether this is an activity the ASX should be both facilitating and profiting from?
Front running, in a broad philosophical sense, is trading ahead of another party's order. Even if you are an average Joe, who happens to be present when another investor screamed to the world he was going to be buying up 5% of BHP, your subsequent buy trade is front running the order of the (rather silly) screamer.
Whether such activity is 'wrong' is another question altogether. I certainly don't have a problem with someone trading ahead of an order announced to the world. I also don't mind a HFTer trading on the back of information made available to 'dark pools'. My concern is around the speed advantage which the HFTer has, to some degree, purchased from the ASX. Whilst information may be, in a sense, 'publicly available', only the HFTer can move quickly enough to take advantage of it.
There was some lengthy dialogue following my last post on this topic (High frequency shopping) which helped to shed some more light on this topic (thanks Mick). It's a very fine line but, to me at least, the distinction is whether the information on which someone is trading is, to the market as a whole, past or future information. My concern remains that, when looked at from this perspective, HFTers are (at least in some situations) trading the future - ie front running.
To repeat, this doesn't necessarily make their trading 'wrong'. But it is fair enough for some investors to be arguing they don't want to play in a game where someone else has an edge and the ASX should be listening to their concerns.
I don't think much of the SMH's myth debunking but I do join them in the call for more information and evidence from those in the know. Faux arguments about liquidity and efficiency only serve to heighten the concern that there is naughtiness going on.
PS For those particularly interested in this topic I came across the following blog post, which contains a number of interesting insights and suggestions (especially around investors being given more control over the execution of their orders). The author also promotes a 'levelled playing field' but suggests that it be done by speeding everyone up, rather than slowing HFTers down.