In the wake of Michael Lewis expose Flash Boys and the news that the FBI is looking into high frequency trading, industry observers are speculating on the impact this interest will have on the high-speed corners of the financial markets. Traders sought out commentary from Roman Kozhan, associate professor finance at Warwick Business School in the UK, for his thoughts.
Traders: One of the accusations in Michael Lewis new book Flash Boys is that high-frequency trading has a negative impact on investors and that the investment arena is rigged. Is this true?
Dr. Roman Kozhan: There may be two possible aspects here. First question is whether or not high-frequency traders manipulate the markets. You can do it, possibly, by sending false signals to the market participants and expecting to turn their actions into profit a few seconds or milliseconds later. One of several possible ways of doing this is flash trading. There is a possibility of increasing market volatility and destabilizing the market by adopting these sorts of strategies.
[Heroes or Opportunists? Meet the Brad Katsuyama and his IEX team from “Flash Boys.”]
Traders: How will regulators respond?
Kozhan: There are some cases where regulators in the US and UK fined traders on the grounds of manipulating the markets and I think that most of market abuses that might come out of high-frequency trading will be of those sorts.
Traders: Is HFT a market abuse like insider trading?
Kozhan: Another question is whether or not the high-frequency traders are using insider information. If a particular trader is getting some material and non-public information before the general public, there may be some legal implications. However, this is an old issue which existed long before the introduction of high-frequency and algorithmic trading. Regardless of whether the trader manually entering orders based on illegal information or using a sophisticated computer-based algorithm, the implications are the same; in both cases the traders will be subject to insider trading regulations. So I do not think this is anything much to do with high-frequency trading per se.
