Author Bio: Vonetta Logan is a financial news reporter for both tastytrade and dough (tastytrade's sister company). After being hired on to our team, Vonetta wanted to find a way to inform consumers and investors about the consequences/repercussions that current events and trends have on the financial space. 'Nailed It!' is a satirical segment created to do just that. 

On this week's episode on High Frequency Trading:

Let’s talk about high frequency trading. Haters say that high frequency trading hurts the market. Traders say they’re providing liquidity. More speed means more money, but for whom? In an era where you can trade faster than you can blink, what does that mean for the average investor?

Transcript/Text Summary:

Let’s talk about high frequency trading. Haters say that high frequency trading hurts the market. Traders say they’re providing liquidity. More speed means more money, but for whom? In an era where you can trade faster than you can blink, what does that mean for the average investor?

The rise of the robots has helped ordinary investors. Bid-ask spreads have narrowed dramatically going from dimes and nickels to pennies. Despite what the media wants you to believe, the majority of investors aren’t trying to game the market based on Consumer Sentiment data. Duration beats direction, and tighter, more efficient markets are better for everyone. So what is all of this about? Book sales.

Michael Lewis has made a fortune writing books that get optioned into big Hollywood movies. He wrote about how Sandra Bullock saved a black man, and how Brad Pitt saved, well, a fat man. Lewis wants to sell books by using the stock market as a backdrop for a morality tale. In his white hat/black hat narrative, he didn’t talk to a single retail investor - only the institutional players who get paid to merely execute trades, not risk their own capital.

The general public thinks after reading this book that the market is rigged and they’re being ripped off, neither of which is true. This is a complicated topic with lots of terms that can go over some people’s heads, so I’m going lowest common denominator on this: let’s bust myths, Maury style.

What about the premise that all of our orders are being gobbled up by hungry, hungry HFTs driving up the prices before we even have a chance? The results are in and we have found out: retail investors…you are NOT the victims of front running! 

HFT firms make up 50%-70% of all trades and the increased competition between firms means that on average, retail investors are seeing price improvement over 90% of the time. It’s the huge institutional traders who are jealous. High-speed algorithms don’t give a rip about the 100 shares of Apple you’re trying to buy. If a high frequency trader invests in their own technology to sniff out predictive patterns across exchanges and takes risk with their own capital, that isn’t front running. It’s called a business plan. 

What about the rumor that increased speed means high frequency traders win all the time? Okay, our results are in and we have found…that it is NOT rigging.

Hmm. How to put this nicely? Retail investors who consume lamestream financial media are dumb money. HFT will take the other side of those trades all day long. That’s why they love to give retail what they want. We’re good at making bad decisions on our own.

Okay, but what about the fact that these super high speed robots cause all the flash crashes?

Okay our results are in…and the system is NOT less stable. On pure principle alone, I will straight tongue kiss on the mouth, anything that Goldman Sachs hates. Goldman used to have Designated Market Maker status at the NYSE, a sort of slow HFT unit. When real HFTs came in with math geeks and computers that ran faster than a Commodore 64, Goldman got dey ass got smoked so they sold off that part of the business, called Michael Lewis (and anyone who would listen) and told them that HFT trading was bad, bad, bad.

With respect to flash crashes, a SEC-CFTC joint report determined that HFT actually improves conditions by absorbing some of the sell pressure. The Dow’s 600-point decline in the 2010 flash crash was reversed in 30 min. The actual crash was attributed to a $4 billion futures sale by a large money manager. That’s right, an actual human! If HFT is so bad, why have we seen banner returns in the S&P 500 and everyone’s 401(k)s are making record amounts of money? Rig me all day long!

The results are in and HFT….IS better than regulating out liquidity. Just ask Europe. The people getting picked off by HFT are other HFTs. Flash Boys ignores HFT revolutionary effects on markets. Lewis fails to mention that the players who invested in speed have also invested in big data and sophisticated analytics. We now have markets priced to perfection where educated investors can weigh probabilities balanced with occurrences to make informed trades.

Everybody is in on the HFT game. The exchanges, the banks, dark pools and the SEC. But no one is standing up and asking what can be done for retail.

So here’s how we fix everything. Instead of a regulatory mish mash, I’m gonna present the top 5 things that f*ck you more than HFT.

1. Getting ripped off by asset managers. The market’s transparent, but how much am I paying in fees, bro? 

2. Getting misled by mainstream media. “buy this stock at all time highs or you might miss out.” Hold still while I paint this target on your back so the high frequency traders can see it. 

3. Wasting money on newsletters and subscriptions from experts. But…so many bollinger bands. If someone tells you they know something, they don’t. 

4. Lack of domain skill. Don’t be scared to learn about the way other financial products move. Options, futures, pairs trades can open up a whole new world to you. Don’t get scurred. 

5. Misguided investments in annuities and other funds with no flexibility or few options in your 401k.

Trading volume has decreased because of a lack of real market volatility and the HFT firms have backed off. All of those angry internet commenters that say HFT takes the place of people who would make those trades anyway, how does it feel when there’s no two-sided action in the market? Could the system be better? Of course! But regulating us to a batch auction system where we write trades on stone tablets isn’t the answer. Faster, tighter markets that are rich with liquidity means I feel the need... the need for speed. Nailed It!


Did you enjoy this episode of Nailed It!? Make sure to leave your comments below, watch the next episode on Cyber Security or check out our entire Nailed It! series on YouTube!