After months of reading negative spin pieces on high frequency trading (HFT) in the press, I was pleased to see Reuters publish a fairly even-handed piece on the subject that not only captures the usual criticisms of HFT, but also a few of the positive aspects. For example:
“A misunderstood dynamic of high-frequency trading is that it thrives off volatility, thereby reducing it. The clear winners in the revolution are small investors, who have seen their trading costs fall remarkably and markets price shares far more efficiently.“
The article also highlights the degree to which these firms keep tabs on and try to one-up each other:
“Lotus Capital Management LP of New York earlier this year realized that a competitor was beating it to a trade it had programmed by exactly 3 microseconds, day after day. The loss meant Lotus was forfeiting about $1, 000 in daily revenue on that particular trading strategy. Lotus, a quantitative trading firm that uses high-frequency strategies, invested and tinkered, eventually shaving five microseconds from the router and two microseconds from the execution server.”
I don’t know if that particular story is true or folklore, but it underscored the effort that goes into being in the pole position for a given trading strategy.