My latest fear is that congress will somehow figure out how to kill off the high frequency traders, because although annoying, they steal less out of your 401-k or Portfolio than Congress or Asset Managers do. If we kill them off, the true proprietary gunslingers out there will have no one to tussle with. Efficient markets can be traded, not crooked ones.
Here is a good overview of the industry:
As expressed by Stuart Theakston, Head of Quantitative Research and Automated Trading with GLC and one of the practitioners featured in The Speed Traders, high-frequency trading has all the attributes required to make a perfect scapegoat:
• It is hard to understand, or at least, it takes a bit of effort to understand (even professional long-only institutional investors have difficulty understanding it)
• It is fairly exclusive, as the firms involved, either have no incentive to talk about what they do (because they are proprietary trading firms and don’t need to attract external capital), or are not allowed to (because they are hedge funds and have regulatory constraints on marketing themselves)
• It employs individual participants having very high levels of academic qualifications, mostly PhDs
• It has some large dollar numbers associated with it (though more in terms of turnover than profitability, as further detailed in The Speed Traders)
• It has lots of terminology associated with it that sounds geeky and confusing to the uninitiated:‘microsecond’, ‘co-location’, ‘momentum ignition’, ‘temporal arbitrage’ etc.
• Some intelligent, well informed and eminently quotable people are railing against it (Mario Gabelli, Paul Wilmott, Richard Bookstaber, among others)
• It is prone to occasionally be a contributory factor (or, in fact, its switching off was a contributory factor) to events perceivable by the public, like the “flash-crash”