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Disrupting Wall Street: High Frequency Trading

Essay by   •  January 20, 2018  •  Research Paper  •  968 Words (4 Pages)  •  356 Views

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Assignment 1
Disrupting Wall Street: High Frequency Trading


Assignment 1
Disrupting Wall Street: High Frequency Trading

Case Summary

Traditional financial market has grown with many investors’ interest to gain profits by trading shares, bonds, funds, etc. Key elements in the financial markets are fairness and accessibility so that investors have fair environments to get information of companies and market trends. Since the technology has been applied to the financial markets, investors have found out the way they can be the dominant position for competing with other participants. High Frequency Trading or HFT is one of the technologies that investors have developed. HFT uses fast, sophisticated computers and computer algorithms to generate, route and execute orders at high speed. This powerful computers often physically co-located to matching engines which gives the ability to access direct data feeds a fraction of a second faster than other non-HFTs. With HFT, investors can decrease latency to microseconds (Goldstein, 2014). Although HFT is known for providing market liquidity and efficiency, if it is morally acceptable is still controversial. Because only HFT traders can be benefit from it, some argues that the market is manipulated.

Main Issues

HFT allows faster access to data

As explained above, the main characteristic of HFT is the use of extraordinary high-speed for submitting and canceling orders. Also co-located matching engine provides minimum latencies (Chordia, 2013). Some market observers just view HFT as new way of faster trading. And pursue of rapid trading is simply a result of digitalization in the financial markets. Since this rapid and computerized trading system was introduced, the volume of trading has been constantly increased from 10% of all equity trades in the States in 2000 to 50% in 2012 (Goldstein, 2014).  However, others points out that HFT system is much favourable to major organization where have ability to afford the co-location services and matching engine system. As a result, Budish, Cramton and Shim (2015) argue that HFT could lead to a “socially wasteful arms race” among HFT traders.

Market needs regulation

Some mentioned that this is not a problem of HFT system itself, but a matter of lack of regulation in the financial markets. HFT traders are profiting from other non-HFT traders by exploiting a hidden loophole in the matching engine systems. This loophole allows HFTs with a direct connection to the co-located trading computers to know of their own trade executions about 10ms faster than rest of the market. As a result, the HFT firms can submit orders in this information before others does (Goldstein, 2014). With insufficient regulations on this activity, some market observers argue that the market is manipulated.

Main Decision Makers

In this case, HFT traders have decision making power. They have ability to afford the sophisticated and powerful computers as well as the cost to locate their computer closer to the matching system. In addition, they are the ones who set predefined market conditions to be matched. As the faster speed computer provides the most profit to HFT traders and liquidity to the markets, high frequency trading is also known as new market maker (Menkveld, 2013).  

Solution to Issues

The rapid speed strategy is one of the key features of technology innovation in the financial markets. The speedy computer itself does not have issue, just a transition from analogue to technology era. However, making profit from other investors’ expense is an issue to deal with.  Securities and Exchange Commission (SEC) investigated whether HFT traders should be subject to regulations (Goldstein, 2014). The U.K. government was also looked into the impact on computer-generated trading in the next ten years. This project recommended a few regulatory action, including limiting possible future market disturbances by implementing accurate and synchronized time stamps, and developing software for the automated forensic analysis of destructive or extreme market events (Goldstein, 2014). Adopt regulation against HFT will help to solve issues regarding unfair accessibility to data.  

IT-based Technology changes Retail

Retail business has been dramatically changed since IT Technology introduced. One of the biggest change is adopting Customer Relationship Management (CRM) system. This system is to understand customers and build long-term relationship with them so that companies can eventually enhance profitability. Traditionally, companies had limited channels to communicate with customers that makes tough to listen and respond. However, CRM system allows companies reach customers easily. For example, Social Studio provides tools to monitor what people are mentioning about the brands on social media so the companies can plan and execute marketing strategies (Social Media Marketing Solutions).

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