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High-Frequency Traders

New insiders on Wall Street ?

Carmen Badali , Peter Sidhu, and Pierre Urier-Cattoire

{4 months on Investopedia~ $66,000

A Trading Experience

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Introduction

The advantages of HFT

The disadvantages of HFT

Summary, Recommendations and Conclusion

Outline

{A question that sometimes drives me hazy: am I or are the others crazy?

Albert Einstein

Introduction to High-Frequency Trading

{Because racing is about being the fastest

The advantages of HFT

France, 12th century: courtiers de change, the first brokers Traders have always tried to be the fastest 1998: HFT is proposed by Bernie Madoff in front of the SEC 2010: 70% of trades in the US, 2% of traders

Quick timeline

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The New-York Times: “Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.”

“The fair evolution of competition on financial markets” by Goldman Sachs and others

Greater liquidity

{Price discovery

Reduction in market volatility

Economies of scale in trading (order latency)

Pros of HFT for short term positions

Brings volume and liquidity to markets

The advantage of microseconds over milliseconds/seconds

Reducing commission prices

Reduce risks

Reduce bid/ask spread “Fill the gap”

Enhancement of competition

{Bombing the market

The Disadvantages of HFT

Programmed algorithms beyond human control

Flash Crash

Unfair advantages through flash trading, computer technology

Lack of transparency – public doesn’t have fair access to information

Dark pools

Regulations and standards for high-frequency trading lackingThe disadvantages of

HFT

A large single trade by a financial company triggered algorithms to buy and sell simultaneously, which sent stocks into a spiral beyond control.

Investigations by the U.S Securites and Exchange Commission concluded that at this time the market is too fragile and fragmented to handle such technology

There is the speculation that a crash could happen again in the future, but may not repair itselfFlash Crash – May 6,

2010

Flash Trading – component of high frequency trading

High-speed trades that give a group of high-frequency traders trading information a in advance before they are entered into the entire market to be filled

Provides unfair advantage to only a handful of investors with access to the technology, or ability to pay for it

Unfair Advantages

Advantages given to flash traders creates a two-tiered market in which a certain class of traders can unfairly exploit others

Dark Pools – Large groups of stocks connected to other networks, which allow traders to move shares through flash trading without announcing the transactions on the open market

Provides ability to anonymously trade, making it difficult for the public to get accurate prices

Traders involved receive an advanced preview of the intentions of larger investors before the public

Lack of Transparency

Hard to see who the high frequency traders are, what they are trading, and when they’re doing it

Regulators and Investors are losing faith in the trading system, unsure of accuracy

It is still questioned whether it’s the high-frequency trading that’s unstable, or the algorithms

Regulations and Standards for HFT lacking

{The world as we knew it

Summary, Recommendations and Conclusion

1. HFT causes volatility when it trades

2. HFT causes volatility when it DOESN’T trade

3. HFT generates massive amounts of profit for financial institutions

4. Technology gives HFTs an unfair advantage over individual investors and institutional investors

5. HFTs who use direct feeds can “predict the future” a few milliseconds in advance, or “anticipate” investor ordersStatements made about

HFT

{ {Pro’s

Greater Liquidity Decreased

Latency Periods Price Discovery Reduction in

Market Volatility

Con’s

Unpredictable Consequences of Algorithms / Too Risky, Ban It

Lack of Regulation and Transparency

Vacuuming up Pennies – Money, not Value

Flash Trading Unfair Technological

Advantage

HFT Summary

{High-frequency traders are not Wall Street insiders; instead they provide a valuable service as the new market makers. High-frequency trading should not be banned.

Recommendations And Conclusion

Questions?