High Frequency Trading visualized
In recent years, the computerization of the financial markets has been stunning. 10 years ago, orders were placed side by side humans in order to exchange financial products. Today, over 90% of all trade decisions are made and executed by computers without human input. Adding computers to human intelligence has allowed the financial markets to become more efficient, faster and liquid, all positive attributes. However, there is a segment of trading that relies on HFT(High Frequency Trading) where it is legitimate to question the purpose of market participation.
Take a look at the explanation below given by the New York Times.
As you can see, the example above leads to worse execution for the customer who enters the market while the HFT computers “front run” the order in order to capture a tiny gain on large quantities. Is it legal, is it ethical, is it efficient? I leave all these questions for the reader to be answered. Personally, at my firm, we also exclusively trade through our computers but I find much more satisfaction in trying to get the market right rather than front run customer orders.
Finally, take a look at a video a precious friend of mine has shown me in this regard. It’s a human hand playing “rock-paper-scissors” against a robot who wins every time due to faster signal recognition. Similar to HFT, decide for yourself, is the robot cheating or outright winning and does it matter or not?