High Frequency Traders - chasing away their reason for being?

We follow the Big Picture blog assiduously and believe that BArry Ritholtz is one of those finance professionals who is unafraid to say what he thinks without fear of favour. His book bailout nation was a must read of a year or two ago and is still relevant if you haven't read it yet.

Anyway we saw a link to a US 60 Minutes story on High Frequency Traderes (HFT) http://www.cbsnews.com/stories/2010/10/07/60minutes/main6936075.shtml and it gave us pause once again to wonder at the relevance and impact of the HFT sector.

It is not always necessary that companies or investors serve the greater good in order that what they do is seen as either good, right or legal. That would be too high a hurdle. But neither do we believe that "enlightened self interest" will, via the invisible hand, necessarily bring the right outcome always for the economy as a whole of specific sectors of it. So it is that once again we are faced with a story about high frequency traders and the question of whether they aid markets or distort markets.

We think they are just scalpers and don't actually add anything to the market. They'll say no-doubt that they provide liquidity. but as we have said before we agree with Andrew Haldane that they are simply the latest manifestation of Greshams Law. If, as the Haldane and the 60 Minutes story suggest, they make up 60-70% of the volume on the US Bourse then they have gone way past just providing liquidity. We'd say they have begun to feed on themselves.

Quoting the SEC Chairwoman the 60 Minutes website says

"The events of May 6th scared people," says SEC Chair Mary Schapiro. She had already proposed more transparency rules for such trading operations before that event, but is considering even more now. "It's unsettling for all investors if an algorithm behaves in an aberrant way and causes a lot of volatility, or causes markets to act in an irrational way," 

Thus if as we think is ocurring and US Mutual fund data suggests, these HFT's via volatility such as the flash crash  are chasing away individual investors and traders it can't be long until the flash traders are left to only trade with themselves. Evolution will get them in the end we reckon but we'd urge regulators to hasten their demise.

WSJ on orders that never trade - illegal if true

Nanex Flash Crash Analysis some cool graphics here