Who’s HFT really hurting?
There has been a lot written of late about the practice of HFT [high-frequency trading] and the damage it can cause but I think there is a side to the argument which is being overlooked.
I agree that HFT is distorting prices in the short term and these people with direct lines to the ASX have a distinct advantage over others when it comes to trade execution. In no way do I think that HFT is a good thing, as I believe people are making money unfairly and opportunistically. It is, as some of the articles I have read suggest, a form of legalised insider trading. The recent “flash crashes” have certainly highlighted some of the wider implications.
However, I think there is a big point which is being overlooked in the arguments against HFT. The only people really at a disadvantage are “traditional” day traders who aren’t using HFT systems. And to be honest these day traders have simply been beaten at their own game by new technology. The same as factory workers were hit by automation back in the day. The same as traditional print media is starting to feel the pinch from online news distribution.
Perhaps it’s a stockbroker point of view but I firmly believe that fundamentals will still win out over a longer time period. Sirius Resources and the like aside, the days of picking any old stock and making 50% within a couple of days are likely behind us. At least for some time and unless you have a HFT “pipe” into the ASX. There is a distinction between traders and investors and I think this distinction needs to be made when discussing who gets hurt from HFT.
Mid to long-term investors should still follow the same investment strategies they would follow if HFT did not exist. That is, research companies, speak to a broker and purchase the undervalued ones at prices that you feel are cheap. Should you decide 100 is a good entry point and a cheap price for a stock, place an order for 100 in the screen. If an HF trader quickly jumps in front of you and buys at 100.5, so be it. You can leave your order in the screen at 100 as long as you wish and once the price comes down to 100 you will buy the shares. Should HFT continue to push the price higher you might miss out on buying the stock. Whilst this is unfortunate, you simply move on to your next preferred pick and enter a price you think is cheap and try again.
This is the flaw in the supermarket analogy in Fil Mackay’s article (The hidden world of high frequency trading). In that analogy the consumer is paying $1.01 for the fruit because the HFT knows the consumer is about to buy it at $1 and gets in first. However, in the sharemarket you do not have to take the time to drive down to the market, find a park and fight the crowds at the checkout - you don’t have to buy it right there, right then. You can place an order for $1 by ringing your broker or even from the comfort of your home PC and patiently wait until you purchase at your nominated price.
Until ASIC change things traders will find it difficult to win, that much is clear. Investors who research companies will be able to obtain high returns over the mid to long term regardless of HFT manipulation.
I think it is an issue every participant in the market needs to be aware of and I am glad that articles are being published on the matter. Not everyone knows the extent of HFT and can easily fall into the trap of buying or selling at an artificial price.
Hopefully recent press articles make more people aware of this practice and ensure that people aren’t falling into the HFT traps and paying artificial prices for shares. If we can achieve this then hopefully less investors will be hurt by these HFT price distortions.
First of all, my congratulations to the team for the new look Eureka Report. I really like it. Keep up the good work.
I wish I understood hedge funds, my ignorance coming to the fore in the feature on same. What is the difference between Retail and Wholesale funds? How do I find out more about hedge funds in general?
Editor’s response: A retail hedge fund is one that is available to retail investors – regular people in other words. Hedge funds started out as mostly wholesale; that is, only open to institutional investors or those with vast fortunes that meant they were treated like institutions. We have started to publish a few more articles on hedge funds in recent weeks, so it may interest you to look back at Chris Gosselin’s May 28 article Dispelling hedge fund myths.
Dear oh dear, I wonder why Dr Doug Turek pays more tax than the rest of us? I notice listening to him in a Eureka video, he postulates that the vast bulk of his outrageous domestic energy price increase was due to the carbon tax. Really?
Doug, as you said that on July 20 and the tax wasn't introduced until July 1, it would not have had time to accumulate, in fact you would not have even received your first inclusive account. Still, like they say, never let a chance go by, eh!
Rates and the dollar
I was very surprised to see Shane Oliver’s simplistic view of lowering interest rates to get the dollar to fall (see Alan Kohler’s Weekend Briefing, August 11 ). I have been a full-time share trader for about 16 years and have never seen interest rates being put up to make the dollar go up for any time, ie when we were at 50c. Why would putting it down have a lasting effect of making it go down? A good example is our last series of cuts and the Australian dollar is as strong as ever. I have great respect for Dr Oliver’s knowledge but in this case he is just following the herd – which is wrong.