High Frequency Trading: The Little Guy is the Big Winner

I figured it would be worthy to synthesize some High Frequency Trading related thoughts I’ve been discussing on Twitter.  Last night I tried, in a few handfuls of tweets, to explain why I do not join those who rail against high frequency trading.  I think it’s (perversely) terrible that we have  politicians, regulators and other motivated parties preaching about how they are going to make markets “fair” for the “little guy”* – nothing could be more damaging to the “little guy” than convincing him that he is on level footing with his bigger, smarter competition in our markets.  That will never be the case.   My thoughts ended up looking a little bit like this when you put them all together:

I think it’s incredibly dangerous to lead retail investors to believe that they will ever be on a “level” playing field.   In reality, we should be telling them that there will always be someone smarter in the market.  There will always be someone faster than you in the market,  there will always be someone who gets the information before you get it.  There will always be someone who reacts before you can react.   But the great thing about current market structure is that those discrepancies have been reduced from tens of minutes to milliseconds:  the playing field is more level than it has ever been, and more importantly: those who want/need faster access can get it!   That was most certainly not the case in previous market structure – there was a closed monopoly system (NYSE specialists).   The current market structure has democratized the role that specialists filled formerly.  Despite all the HFT hysteria, I think that democratization is a phenomenal thing.

There’s something else I want to add, because it’s a huge brick in the Anti-HFT narrative:   there is this repeated claim that we need to “level the playing field for the little guy.”   Hogwash – the little guy is the *beneficiary* of most high frequency trading activity!   What do I mean?   HFT competition to capture spreads has resulted in extremely tight markets.   Instead of bidding for stock to avoid paying spreads measured in 1/8th’s or more like we had to in the old days, we can now lift offers and hit bids – taking advantage of these penny wide spreads.    The *losers*, then, are the big boys – traders executing big orders who leave big footprints.   They have to be much more careful, and face competition from high frequency traders.

I was once one of these big traders.  Now I am a little guy – and I know damn well that the current market structure doesn’t disadvantage me – on the contrary: the little guy like me is the winner.  My old job would be a lot harder now due to competition from high frequency traders and others – would you shed a tear for me?   Maybe I should  have titled this post “Don’t Cry For Me, Goldman Sachs…”   Do you feel bad for the guys at Goldman Sachs, JP Morgan, Barclays, etc – who have to adapt their execution methods in the face of new competition?    If you want to argue that the big sell side broker dealers who have to adapt to current market structure are the victims, then fine: do that – but don’t hold up “the little guy” as your victim-needing-to-be-defended when you’re really fighting for The Big Guy.

My goal, dear readers, is for you to question the motivation of those who are railing against high frequency trading.    They often do so in the name of “standing up for the little guy,” while in reality I think they are doing exactly the opposite: standing up for the big guy who is losing out to competition in “his” market.

I used another analogy on Twitter – from the end of the movie The Hunt for Red October where the Russians end up blowing up their own sub:  “You idiot… you killed us!”   I fear that’s how this will end for those who get tricked into supporting efforts that purport to help “the little guy” who is being misled to believe that he’s the one on the losing end here in the first place…


Someone Will Always Have The Data First

The Little Guy Has Nothing to Complain About

Levine: High Speed Traders Trade Faster Than Low Speed Traders

Levine:  High Speed Traders Still Trading Faster Than Low Speed Traders

EDIT:  two more good links:

Levine: Michael Lewis Doesn’t Like High Frequency Traders

Larry Tabb: No, Michael Lewis, the US Equities Market Is Not Rigged 

Clark Gaebel:  HFT’s Are Not Frontrunning

Mercenary Trader:  Dumb Tourist Review of Michael Lewis’ Flash Boys

Scott Locklin:  Michael Lews: Shilling For the Buy Side

Marginal Revolution:  A Study of Limiting HFT

Rishi Narang: High Frequency Traders Can’t Front-Run Anyone

Cliff Asness:  High Frequency Hyperbole Part Deux

if you only read one post on the subject, make it Tabb’s – it’s a terrific top to bottom summary of the issues.


* from Bloomberg today:

SEC Commissioner Daniel Gallagher said on March 28 that individuals are concerned that high-frequency traders detract from fairness in the marketplace.

“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” Gallagher told CNBC during an interview. “That perception to me is a reality. It’s something we need to address.”

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