The Role of HFT Intermediaries
Financial markets have always needed professional intermediates to offset short term supply demand imbalances, find the fair price which reflects current buying and selling pressure, and provide continuous prices to investors.
Throughout history, different markets have had different sorts of professional intermediaries:
Computerized trading technology has transformed markets.Today, the important role previously played by human traders is now filled by the computers of high frequency trading firms.The speed and efficiency of computerized trading allows HFT firms to be the most cost effective financial intermediary that have ever existed.Spreads are now tighter and trading costs lower than ever before.With HFT powered markets, investors are saving money every time they trade.
Industry Support for the Role of HFT Intermediaries
“High-frequency trading plays a critical role.”
– Tim Buckley, Chief Investment Officer, Vanguard Group
“Generally speaking, high frequency traders provide liquidity and “knit” together our increasingly fragmented marketplace resulting in tighter spreads that benefit all investors. We believe that a vast majority of “high frequency trading” is legitimate and adds value to the marketplace.”
– Gus Sauter, Retired Chief Investment Officer, Vanguard Group
“Our study provides causal evidence for the critical importance of liquidity provision by high frequency market makers in today’s markets.”
– Professors Katya Malinova, Andreas Park and Ryan Riordan
“Given the fragmentation of liquidity (electronic trading) is absolutely necessary to connect buyers and sellers.”
– Richard Prager, BlackRock Global Head of Trading
“Margins are very low, competition is very high and these high frequency traders provide liquidity and price discovery services to the market.”
– The Committee on Capital Markets Regulation
“…a majority of HFT activity serves to connect those natural buyers and sellers and reduce waiting times, often substantially so. “
– Ana Avramovic, Credit Suisse
“By lowering transaction costs, HFT raises rates of return to investors and boosts asset prices.”
– Dr. Stephen Kirchner, economist, Australian Financial Markets Association
“When considering the optimal industrial organization of the intermediation sector, HFT more resembles a highly competitive environment than traditional market structures.”
– Terry Hendershott, Associate Professor of Finance at the University of California, Berkeley
“Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets.”
– U.S. SEC Division of Economic and Risk Analysis
“Proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during crisis …”
– Toulouse School of Economics Study: “Who supplies liquidity, how and when?”
“(HFT is) a type of investor that’s absolutely necessary for the market.”
– Hiromi Yamaji, Osaka Exchange CEO
“Our empirical results showed that traditional measures of market quality such as execution speed, bid-ask spreads, and transactions costs all had improved dramatically over time.”
– Professors James J. Angel, Lawrence E. Harris and Chester S. Spatt
“HFT helps to create efficient markets by facilitating price formation, lowering the cost of trading and improving the linkage between markets … achieving optimal investment performance for end investors.”
– Blackrock ViewPoint (a series of papers on public policy)
“If you look at what most of those high-frequency traders actually do, they are doing things that really support long-term investors.”
– James J. Angel, Associate Professor of Finance, Georgetown University
“I think our markets are really very, very efficient… When I was a broker originally, stocks traded at an eighth of a point or a quarter of a point differential. Now they trade at one tenth of one cent differential.”
– Sandy Weill, former Chairman and CEO of Citigroup
“Academic literature, however, has praised electronic trading for making the markets more efficient, especially for retail investors. While the efficiency created by fragmentation may make it more challenging for large asset managers to acquire blocks of stock, for individuals buying hundreds or even thousands of shares, electronic trading has made investing more democratic, transparent, faster and much less expensive.”
– Larry Tabb, CEO of the Tabb Group
“HFT has become a matter of controversy because of a false meme that has spread through the media. The false meme alleges that HFT traders get an unfair advance look at the orders of mutual funds and other investors. That just isn’t true. Institutional investors are extremely concerned about information leakage from their orders.”
– James J. Angel, Associate Professor of Finance, Georgetown University
March 15, 2017: Report – We’re All High Frequency Traders Now
Credit Suisse Analyst Ana Avramovic reports that as institutional investors avail themselves of these sophisticated algorithms, and discount brokers fill retail trades through HFT wholesalers, we’re all high frequency traders now.
July 22, 2016: Study – How Rigged Are Stock Markets? Evidence from Microsecond Timestamps
University of California, Berkeley Professors Robert P. Bartlett, III and Justin McCrary analyze microsecond market data and conclude: Trading surrounding SIP-priced trades shows little evidence that fast trading intermediaries initiate these liquidity-taking orders to pick-off stale quotes. These findings contradict claims that fast traders systematically exploit traders who transact at the SIP NBBO.
July 2015: The U.S. Treasury Market on October 15, 2014
This joint staff report examined a period of unusually high volatility in treasuries.It introduces the term Principal Trading Firms (PTF) to differentiate a category of traders from a category of high frequency trading (HFT) tools trading tools.It found that in times of the October liquidity crisis, banks chose to pull liquidity and widen spreads, while PTFs remained in the market providing continuous liquidity.
December 2014: Committee on Capital Markets Regulation – What is High Frequency Trading”?
Defines HFT strategies in the context of historical trading practices.“High frequency trading strategies are consistent with trading strategies that have always existed in securities markets.”
April 2010: LSE Analysis of Trades by High Frequency Participants on the London Stock Exchange
This study examining two months’ worth of trading finds that automated trading participants provide liquidity when spreads are wide, demand the liquidity when the spreads are narrow, and smooth out the liquidity over the long term.
May 2013: Understanding High Frequency Trading
The World Federation of Exchanges notes the “substantial majority of the empirical research to date has concluded that HFT has measurable beneficial impacts on a variety of core market quality metrics, including tighter spreads, increased liquidity, more efficient price formation, reduced transaction costs for market users and lower market volatility in most circumstances.”
Spring 2012: High-Frequency Trading and Price Discovery
Terry Hendershott, Associate Professor of Finance at the University of California, Berkeley, examines the reduced the role of traditional human market-makers that has led to the rise of a new class of intermediary, typically referred to as the high frequency trader (HFT).He finds that HFT more resembles a highly competitive environment than traditional market structures.
TIMOTHY MASSAD, CFTC Chairman
June 3, 2015 Speech