High Frequency Traders: Confusion Continues to Reign

by: Streetwise Blog

By Andrew Willis

They dominate stock exchanges, accounting for the majority of U.S. equity trading and a growing portion of the buying and selling done in Canada and Europe.

Yet even supposedly sophisticated institutional investors don’t know what to make of high frequency traders.

A survey by consulting firm Greenwich Associates on these suddenly controversial traders - also known as electronic liquidity providers, or ELPs - show the Street is split on their role in the market.

Some money managers see ELPs as the greatest thing since floor traders, as they provide liquidity for all investors. While there are a number of players in this space, companies such as Getco and Tradebot are market leaders among ELPs.

At the other extreme, there are institutions that want the ELPs banned on the grounds that they increase trading costs for all investors.

Greenwich’s survey shows there is a need for substantive research on the true impact of high frequency trading. As the consulting firm found, “even some of the most active institutional stock traders cannot agree about whether high frequency trading helps or hurts institutions, retail investors and the companies with publicly trading stock.”

“More specifically, we would urge the SEC to commission an academic study on the short-term and mid-term effects of high frequency trading on a company’s stock: opinion is evenly divided as to prospective benefits v. negatives, with fully half of institutional investors claiming uncertainty,” says Greenwich Associates consultant Jay Bennett.

Greenwich found 57% of institutions it surveyed supported additional regulations on high frequency trading, while 21% would actually support a high frequency trading ban, “though the latter sentiment primarily comes from Canadian advocates.”

In a result that shows just how this issue splits the investor community, 45% of institutions said high frequency trading poses a threat to the market, while 36% said the practice “actually benefits the market and investors by increasing overall liquidity.” And 20% of those surveyed said they lacked the information needed to reach an informed view.