Blame Game
In the 1946 film Gilda, Rita Hayworth sings the satirical song Put the Blame on Mame. The song describes a seductress so disruptive, her wiles caused the Great Chicago Fire, New York Citys Great Blizzard of 1888 and the 1906 San Francisco earthquake. Its been playing over and over in my head lately, albeit with an updated title – Put the Blame on High Frequency Trading (HFT) – as another trading platform seeks to discriminate against high frequency traders and blame them for predatory market strategies.
Recently, Aquis announcedthat it will ban latency arbitrage on its platform. To do this, they will only allow passive orders. Well, that is, only passive orders from HFT. All other traders are free to use the exchanges full complement of order type functionality, including, presumably, those that facilitate latency arbitrage. Alasdair Haynes, the founder of Aquis, is quoted as saying this is absolutely not against HFT. But how else can you describe restrictions applied to only certain types of traders?
At this point, the latency arbitrage myth has been debunkedin so many places that Im not going to waste more keystrokes on it. The larger issue in this case is that by limiting HFT to passive order types, Aquis misses a fundamental concept of trading. Because investors use a mix of both passive and active strategies in their trading, both passive and active orders used by HFT intermediaries are essential to liquidity provision and should be broadly encouraged. Together they improve the market in terms of the bid-ask spreads, depth, and price impact and lower transaction costs for institutional and retail investors.
But, disparaging HFT as a marketing strategy is nothing new. Some brokers and dark pools have long used the pitch that eliminating predatory HFT intermediaries from their trading pools would expose participants to only long term investors and make for a better trading experience between only real traders.
The thinking goes, If only the HFT intermediaries would clear out and let buyers and sellers come together naturally wed all be better off. And that looks great on paper. Especially glossy, brochure paper or book dust jacket paper. But the reality is, the top three venues that look to pair these natural buyers and sellers combine to trade about 50 million shares a week. This compares to platforms with HFT intermediaries that trade billons of shares a day. In short, intermediation is what makes trading happen. And wed add that HFT intermediation makes it happen at a fraction of the cost that it used to.
Hopefully someday the HFT as boogeyman marketing tactics will be retired in favor of the broader realization that HFT provides plentiful, inexpensive liquidity. Maybe then people will no longer look to put the blame on HFT.
