HFTs Are Still Blamed for Everything Bad in the Markets (At Least, In the U.K.)

While recent press in the U.S. (erroneously) reported the near-death of HFTs due to rising costs of fast communication and other new barriers to entry and survival and the industry, the press across the pond believes that HFTs are still taking over the U.S. markets and blames the HFTs for all the possible wrongs and evils in today’s financial markets. To wit, an article from March 17, 2017 in none other than the venerable Financial Times, held HFTs responsible for flash crashes, the disappearance of trading opportunities relating to post-earnings announcements, and the dominance of “shorter and faster trends” that preclude long-term investors from the benefit of earning by jumping on the ol’ good momentum bandwagon.

As described in our brand-new bestselling book, “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” (Wiley, 2017), everything in the markets is indeed happening much faster than ever before. Such time compression is very much due to one factor: the proliferation and adoption of increasingly affordable and scalable technology. High-Frequency Trading (HFT) is only one manifestation of this trend: driven by advances in data storage, computational power, and communication technology, HFTs managed to compress days and hours of previously-manual trading activity into nearly-instantaneous operation. For more details on HFT, please see another book of ours, “High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems” (Wiley, 2nd edition, 2013). The much more revolutionary changes to the financial markets explained in “Real-Time Risk” are not yet prominent, but are well under way: technology giants like Apple and Google are quietly building their own banks and financial operations utilizing cutting edge technology unheard among traditional banks. Will companies like Citi and the London Stock Exchange even be able to survive when the new wave of technology launches?

In addition, as described in detail in “Real-Time Risk”, the more recent published and peer-reviewed research shows that HFTs are not at all to blame for phenomena like flash crashes. For one, flash crashes are not a recent phenomenon, and are less frequent since their peaks in 1970s. How come flash crashes did not make news then? Quite simply, there was no data that allowed news outlets and individual investors to measure the intraday crashes. In contrast, today, every investor, no matter how unsophisticated, can spend days looking at the tick-by-tick evolution of the stock market right on his laptop on a free self-updating Google markets page. Second, as the “Real-Time Risk” book shows, the flash crashes are not just caused by high-frequency traders. Instead, the flash crashes are a direct result of deformities in the health of financial markets, illnesses that can diagnosed as far as a day or two in advance. The advance impending Flash Crash warning delivered by companies like AbleMarkets, is retrieved using Big Data techniques, and gives investors sufficient time to protect their portfolios from the upcoming havoc.

The disappearance of post-announcement earnings opportunities is likewise not the result of HFT, but the better handle most investment managers have on timely delivery and processing of data, as discussed in “Real-Time Risk”. In fact, the demand for data processing skills is so high demand among U.S. investment managers, that it is the data scientists, and no longer quants, who are in top demand and are paid premium dollars right out of school. The high profile and near-sold-out attendance of our upcoming 5th annual Big Data Finance conference on May 19, 2017, in NYC, is also an illustration that the proof of the changes in the modern markets is due to wider adoption of technology to harness data, not in HFT.

Irene Aldridge is Managing Director, Head of Research at AbleMarkets, a Big Data for Capital Markets company, specializing in real-time and near-real time Software-as-a-Service improving execution, portfolio allocation and risk management. She is a co-author of #1 New Release and Number 1 International Bestseller in Financial Risk Management category “Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes” (Wiley, 2017), and an author of “High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems” (Wiley, 2nd edition, 2013). She can be seen at the upcoming 5th annual Big Data Finance Conference at NYU Center for Data Science on May 19, 2017.