This week at the Futures Industry Association (FIA) conference, the hot topic is whether government regulators should force the registration and regulation of high frequency trading firms. As this Wall Street Journal article highlights, government regulators know they don’t fully understand the impact of HFT on global markets, especially how they help or hurt non-HFT traders.
There is fairly clear evidence that HFT has lowered spreads by providing increased liquidity when markets are running smoothly, but there have also been incidents like the “Flash Crash” where HFT appeared to play a role in the panic as automated trading systems exited the market when volatility spiked. The press loves controversy, so most of what you will read about HFT is negative—highlighting what might or could go wrong.
If efforts regarding regulations proceed, I hope HFT gets a fair trial. In the current economic climate and election cycle, there’s a real risk that media punditry, political grandstanding, and whatever voice the Occupy Wall Street movement ends up contributing might skew an outcome before the data and facts are understood.
It seems to me that the genie is out of the bottle where electronic trading is concerned. We need to make sure that we understand and tweak the model for maximum benefit, not initiate change based on fear of the unknown.