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Todd Harrison: HFT Perception Is Reality

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Why high-frequency trading matters to you.

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In case you haven't been paying attention, there's a rather rigorous debate going on surrounding HFT. 

And you shouldn't be surprised -- there is a LOT of money at stake, and the firms involved read like a who's who of financial players. I'll let you decide the merits of high-frequency trading, but regardless of what side you're on, don't dismiss the potential ramifications.

Wall Street doesn't need another black eye. After a decade of getting whipsawed, many investors have lost faith in the system despite stocks trading at all-time highs. Indeed, the prevailing social mood doesn't feel like we're trading at all-time highs, but that's a different conversation.
I'm more concerned about the structural integrity if we continue down this path or, conversely, if there's a regulatory detour.

Where you stand is a function of where you sit. Through the years -- as recently as during a business lunch today -- HFT emerged as a hot-button issue. Not long ago, there was an article on Minyanville about HFT, and the head of a major exchange emailed me to defend it. I was surprised at his rigor, but I suppose I shouldn't have been: His firm was "co-locating" servers for a hefty fee.

To be clear, I don't know if any laws have been broken; I'm more of the view that you cannot regulate what you don't understand. Case in point was the financial crisis: By the time "subprime" was a household phrase, it was too late. Five years later, rulings are still coming through the legal system. 

And there don't have to be laws or regulations passed for there to be an impact. As firms start to distance themselves from the process, either as a moral obligation or a marketing ploy, parallel trading universes could emerge, and therein lies the risk. We're almost four years removed from the Flash Crash, but that session should be seared into the minds of traders. 

When the going gets tough, and if the tough "turn off and tune out," if even for a moment, we'll see the "other side" of the HFT trade. In the meantime, we'll continue to do what we do -- one step at a time. 

Through that lens, please note that the Russell 2000 (INDEXRUSSELL:RUT) and Nasdaq-100 (INDEXNASDAQ:NDX) are back below "the" levels, while the S&P 500 (INDEXSP:.INX) and BKX (INDEXSP:BKX) have some cushion.

Good luck into the close.

R.P.

Twitter: @todd_harrison

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