Automated trading keeps getting more and more popular among traders around the globe. Trading robots do help their owners to get rid of routine work. Robots are not subject to fear, greed and other emotions, which is another benefit of automated trading.
Moreover, automated trading is the only option when it comes to high-frequency intensive trading (when trades are opened and closed within milliseconds). Robots certainly have an edge over human traders in this and many other aspects. That is why more and more traders start expressing concerns over the issue.
Some experts say that trading robots have a negative impact on financial markets. That is why the financial authorities in the USA and Europe have to address the problem.
In particular, the U.S. Securities and Exchange Commission (SEC) has recently started inspecting the software used by high frequency traders in order to regulate the trading process and to prevent market abuse.
Why are some traders skeptical about this decision? What is the probable outcome? Market Leader and will try to answer these questions in this article.
High-Frequency Trading: Pros and Cons
According to Vitaly Dolgov, a representative of RoboForex, automated trading is a natural outcome. It is the next stage in the evolution of trading. It is useless to hinder this process. It cannot be stopped. It can only evolve.
High-frequency trading is a type of automated trading using sophisticated technological tools and computer algorithms to trade securities on a rapid basis (within milliseconds).
Some institutional and individual traders and investors complain that high-frequency trading is the major reason for their losses. A range of experts support their point of view by saying that HTF robots have flooded financial markets and keep increasing market volatility (and instability) as well as getting an unfair edge over other market participants.
Several examples confirm that they try to make HTF a scapegoat. For example, Bats canceled its IPO as a result of some major computer system failure (it provoked chaotic market behavior).
According to Eugene Olkhovsky, ’s leading expert in financial markets, it is not that difficult to monitor a certain market in order to minimize risks. It is all about the quality of the implementation. If it is incorrect, it may result in even bigger problems. Therefore, sometimes it is better to leave everything as it is.
Sometimes, people confuse HTF with several ways of abusing the market. For example, “dirty” traders open a lot of big-scale pending orders to misguide the market (the orders are never executed).
Those who oppose HTF, often say that high-frequency traders get an unfair edge by using remote servers for their robots, which allows them to get their trading orders executed much faster.
Still, blaming people for getting a competitive edge by means of innovative products is irrational. Many years ago, when there was no HTF, some market participants still received market information faster than others. If you do not try to catch up with progress, you are doomed to be an underdog.
Expert Opinion
At this point, most of the trading in financial markets is done by trading robots. The army of robots keeps growing. At this point, HTF accounts for over 50% of the overall trading volume.
Some experts say that HTF is a contemporary, innovative and sophisticated kind of inside trading because (as they say) it is based on the ability to see the market situation milliseconds before other market participants access it. However, those milliseconds are enough for trading robots to get an edge over rivals.
They say trading robots increase market liquidity. However, in reality this is more like an illusion of higher liquidity.
The chart below, courtesy of , confirms that:
We can see that the amount of trading robots is growing but the real trading volume has declined. Still, most stock exchanges around the globe keep supporting automated trading because the major players in the auto trading niche are Goldman Sachs, JP Morgan, Citigroup and other major banks. They own those marketplaces. Therefore, a natural question arises: How can they deprive themselves of such a tasty and big piece of cake?
Not so long ago, the SEC decided to ask for Tradeworx (a small IT company) to teach them how to use Midas, which would help the regulator to widen its possibilities when monitoring financial markets.
The software can collect data for any trading order set for execution on any of the 13 US marketplaces. If there is an excessive amount of pending orders (and this threatens the stability of a marketplace) the system can cancel excessive orders.
The SEC assumes that the growing amount of major companies involved in HTF threatens the market as those companies may eventually oust other market participants.
Sometimes excessive HTF may result in server reloads like the one that provoked an uncontrolled increase in the market of Kraft’s stock (Nasdaq). Eventually, the regulator had to cancel a certain part of the deals.
German has recently made a step towards toughening the HTF regulation. Legislators adopted a law imposing extra limitations on HTF traders. Now they have to get a special license and let certain monitoring mechanisms be embedded in their trading software to prevent market abuse.
Obviously, automated trading is a natural part of today’s trading environment and we cannot get rid of it. However, certain restrictions are really needed to prevent HTF traders form totally dominating financial markets.
Market Leader and conduct a survey:
Do you think HTF is a major threat to human traders?
