High frequency trading is generally good for the market, the buyside and is partly the result of Reg NMS, which included the trade-through rule.
Those were some of the comments of George U. “Gus” Sauter, the chief investment officer (CIO) of Vanguard Funds.
“I think the lion’s share of high frequency works to the benefit of the marketplace. It provides liquidity to the marketplace. It provides tighter spreads than we would experience otherwise,” Sauter told Traders Magazine.
The longtime Vanguard executive, wrapping up a quarter century with the biggest fund company in the industry, will retire the end of the year. He believes that part of the controversy over HFT is some misunderstand it. The difficulty, he adds, is HFT encompasses many separate strategies.
“But I think the lion’s share of high frequency works to the benefit of the marketplace,” according to Sauter.
Reg NMS, the massive market structure/order protection rule change passed six years ago after protracted debates, was an attempt to bring the national market system together. But Sauter believes it also pushed the market in the direction of high frequency trading, Sauter says.
“Reg NMS,” he adds, “is not effective unless there are people arbitraging the different market venues. And all of those various players and venues have contributed to make it a much better marketplace than twenty years ago.”
Sauter concedes that there are some HFT traders trying to game the system. Still, he believes that “by in large on the buyside we have benefited significantly and it shows up in our transaction costs.”
He believes that transaction costs have gone down significantly over the past two decades as a result of various reforms. Still, Sauter warns that most investment companies and traders aren’t equipped with powerful transaction costs analysis tools. So most of them don’t know exactly what is lost in the process of buying a stock.