It seems that everybody who is associated with the stock market is getting panicked over the recent surge in debates over the "fairness" of high frequency trading. The possibility of the existence of a rigged stock market has caused serious concerns over the continued usage of automated trading systems. Many have suggested that the so called accused need to be penalized appropriately and strict restrictions need to be implemented in order to solve the issue. But the problem is that no one has really gone to the bottom of the problem. Moreover, no one really knows what the problem is all about. They are simply moving in the direction in which the majority of the traders are moving.
The following 5 steps should help to make high frequency trading "fairer" and therefore more acceptable in the eyes of the global trading population.
1. The first and foremost need is to ensure that everyone gets the information at the same time. There is a dire need to stop the disclosure of information before the intended time by any means (usually involving Embargoed, sold or otherwise released information). This will give a better chance for people to make their judgements without cribbing about the fact that HFT systems are able to get access to crucial data before them.
2. Front running should without a doubt be penalized. But this is not as easy as it seems. The very essence of trading is to position your financial moves in such a way that you are able to generate profit from it. In keeping with the ongoing detection of insider trading cases, there is a need for penalizing the use of any algorithm that front runs a 500,000 block of Intel.
3. There is absolutely no need to cut down on spreads and / or commissions. These monetary benefits act as motivation for financial dynamics in the stock market and also helps to maintain adequate control over speed trading.
4. The most important requisite to curb unfair practices is to ensure the existence of transparency in the all processes, including bids, asks and fills such that all the information pertaining to these components is made available for the public. This will make it hard for malpractices to occur as the slightest of movements would be duly identified by the traders.
5. Market-makers could be brought back to provide higher liquidity but this must only be done as a last resort when everything else has failed. And in return for their role in filling up the void, they can be provided with an appropriate monetary consideration. Is there a better way to encourage fund flow in the market by ensuring better liquidity with the use of market-makers?
These are suggestions based on the key issues that have been perceived for the stock market with respect to the involvement of high frequency trading activities. The suggestions have addressed most issues which should bring about the integration of fairer trading practices while discouraging the use of malpractices as insider trading.
One should understand that Automated Trading Systems may be used for assisting trading activities but it is best if they are used only for placing the order fast and working independently without having the need for the trader to frequently monitor the market. Using unauthorized means to access information before everyone is not morally right and is in direct violation of the ethics of trading. You should only use it as an assisting facility and not for indulging in wrong manipulative activities.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.