HFT Provides Benefits: Market Structure Exec

Terry Flanagan

Bug any bar where the conversation centers around the threats or benefits of high-speed trading to market stability and you will hear varied opinions from retail and institutional investors alike.

The electronic-trading methodology known as high-frequency trading, which comprises more than half of all equity volume in the U.S., is an easy piñata for headline writers whenever there’s a market-structure concern or problem of any sort. But as some market participants and observers note, what’s less publicized is that beyond the periodic disruptions – some of which involve only a tiny fraction of the market and are corrected almost immediately – high-frequency traders lower the everyday costs of trading and investing.

“The customer’s perception might be that they are having a worse experience in the markets,” said TD Ameritrade Managing Director of Market Structure Paul Jiganti. “That is wrong.”

To support the notion that high-frequency trading is a net positive, Jiganti noted bottom-line evidence of narrowing bid-ask spreads, which translate into lower costs. “The benefits of high-speed trading are shown in the spread width between 2000 and 2013,” he said.

For hedgers and other end users looking for risk transfer opportunities, “transaction costs are way down because of the lower cost of spreads and the lower cost of brokerage,” Jiganti said.

To be sure, high-frequency trading has its detractors, who say its practitioners essentially profit by nicking large institutional trades and don’t add value to the market. Academic research on high-frequency trading is mixed — some research has shown that HFT lowers trading costs, while other work has concluded that HFT boosts trading costs for other market participants.

“Within the wide definition of HFT, there are bad some actors who give the entire group a black eye,” Jiganti said. “They receive the deserved negative attention but unfortunately for the rest of the group, they are all lumped together.”

Over the past five years, during some of the most stressful points in market memory, no harm was done by an exchange or a brokerage, Jiganti noted. He credited the U.S. Securities and Exchange Commission for maintaining a level playing field, the goal of TD Ameritrade and other custodians of retail accounts.

When market oversight gets transitioned out of the SEC’s hands due to knee-jerk reactions, “you get a legislative answer and a less thoughtful outcome” than when SEC makes the decision, Jiganti stated.

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