High-frequency trading remains in the spotlight as New York's Attorney General announced a new crackdown on vendors in the business.
NY AG Eric Schneiderman announced he will take a deeper look at high-frequency trading world, particularly vendors that provide services for HFT traders.
He called for reforms that he says would eliminate "unfair advantages" that high-frequency trading firms have over other investors. Those advantages are offered by exchanges and other service providers and include: allowing traders to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG's office said today.
High-frequency trading has drawn much attention in the last few years especially after the May 2010 "flash crash." The trading strategy has grown as firms invests more money in rapidly evolving technology, and look for an edge over competitors.
HFT firms typically trade hundreds or thousands of times per day for their own account, with a typical holding period measured in seconds or minutes, according to research by Charles Jones, professor of Finance and Economics and the Director of the Program for Financial Studies at Columbia Business School.
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High-frequency trading platforms rely on early access to crucial information as it hunts for price efficiencies in the markets. The early access is sometimes measured in mere milliseconds, but for HFT firms making rapid trades, the difference can make a significant difference in profit. HFT strategies earn only a small amount of profit per trade and might only make money on 51% of trades, but since the trades are made hundreds or thousands of times a day, they are often consistently profitable, Jones notes in his research.
While HFT has been at the center of many regulatory conversations, the trading strategy does provide benefits to the markets. Jones points out in his March 2013 research paper that the HFT has been shown to improve market liquidity, reduce trading costs, and make stock prices more efficient. "Better liquidity lowers the cost of equity capital for firms, which is an important positive for the real economy. Minor regulatory tweaks may be in order, but those formulating policy should be especially careful not to reverse the liquidity improvements of the last twenty years," the paper notes.
Scheiderman's office says its focusing on practices that give elite groups of traders early access to market-moving information. Last year, after probing from the AG's office,
“I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market," Schneiderman said in a statement. "We call it Insider Trading 2.0, and it is one of the greatest threats to public confidence in the markets. It’s long past time that we focus on structural reforms to help eliminate the unfair advantages enjoyed by high-frequency traders.”
