The arguement Mr Lewis advances is that high-frequency traders have profited particularly from the ability to use the edge that their quicker access-to-order flow information gives them to "front run" the orders of other investors, something that in other guises has long been illegal. He highlights the fact that a number of high-frequency traders have had virtually no losing trading days for more than five years, a phenomenon that flies in the face of the common sense observation that trading is - or shoud be - a zero sum game.
Such a record implies, at best, that the high-speed traders are taking no risk, and at worst that they are exploiting an edge at other market participants' expense - playing the markets, in the author's telling phrase, the same way that card counters in a casino play blackjack. Meanwhile stock exchanges and broking firms, he alleges, have for some time effectively been complicit in this nefarious activity, often effectively at their clients' expense.
If he is right, the argument that by reducing transaction costs and improving market liquidity HFT is working to the benefit of investors looks weak. Mr Stiglitz argues convincingly that the ability to trade fractions of a millisecond faster before is unlikely to be an advance that of itself has any real social value, net of the costs (in terms of heightened intraday volatility, loss of pricing transparency and other consequences) that come with it.
Most telling of all, I fear, is the fact that several of the participants in the HFT game have form. We might not have believed before, for example, that the big broking firms were capable of skimming profits from their own customers, but since the inquest into the global financial crisis we now know better. The Libor and forex scandals provide prima facie evidence that opportunities to rig a market in the world of finance, if offered, will be taken. Wall Street's moral compass, if not an out-and-out oxymoron, has patently gone awry in recent years.
In the interests of natural justice, the protagonists of HFT should clearly have a chance to defend themselves against the assorted crimes and misdemeanours of which they have been accused. Maybe they have been horribly traduced and we are all too stupid to understand what they do - in which case they have nothing to fear from a detailed forensic examination of their trading.
This is the best summary that I have seen on the subject, not least this sentence.
“Wall Street’s moral compass, if not an out-and-out oxymoron, has patently gone awry in recent years.”Back to top