High frequency traders polish public image

Four U.S.-based high frequency trading firms are banding together to champion high-speed trading before regulators and the public.

Automated trading has bad name because of wild market swings

Automated trading under microscope

10 years ago
Duration 5:48
Peter Nabicht is part of the lobby group making a case for high-frequency trading

Four U.S.-based high frequency trading firms are banding together to champion high-speed trading before regulators and the public.

High-speed or automated trading has been blamed for distorting the markets and leaving smaller investors out in the cold.

High-frequency traders move rapidly in and out of stocks and commodities to capture fleeting shifts in prices.  They commonly use proprietary algorithms, state-of-the-art computers and ultrafast connections to exchanges to make quick and frequent trades.

But they are implicated in some big market swings, including a “flash crash” on May 6, 2010 that caused wild swings on the Dow and another in April 2013, in which a false tweet sent markets reeling.

The Modern Markets Initiative group believes it needs to “explain the valuable role that high frequency trading and automated trading play in the markets,” according to Peter Nabicht, a senior advisor to the group.

“I think it’s important that there is a voice of leadership in the debate about electronic markets, about automated trading, about high-frequency trading,” said Nabicht, who was formerly with Chicago-based high-frequency firm Allston Trading LLC, told CBC’s The Lang & O’Leary Exchange.

High-frequency trading firms are responsible for about half of trading in the U.S. equities market, according to investment firm Rosenblatt Securities.

And while it has many critics, there is also research that shows it lowers costs for investors, Nabicht said. 

“The markets are narrower, the markets are tighter – there’s as good if not better liquidity than there’s ever been before,” he said in defence of high-frequency trading.

“Many smaller investors actually use a lot of the tools created for high-frequency trading . Most of the brokers and dealers I go through now are connected to the markets electronically and use similar techniques – in fact they use algorithms that started in high-frequency trading,” he added.

The Modern Market Initiative has hired two political strategists, Kevin Madden, who helped run Mitt Romney's 2012 presidential campaign, and Erik Smith, who worked on President Obama’s campaign, to make the case in Washington, D.C.

Nabicht said one of the roles of the group would be to contribute to a “reasoned and rational” discussion about automated trading among U.S. regulatory agencies.

Several regulators, including the Securities and Exchange Commission, have called for a broad review of computer-driven markets amid concerns that trading has become too complex and plagued by glitches.

“Our concern isn’t one particular regulation. Our concern is the unintended consequences of making new regulations,” Nabicht  said.

“The more reasoned and rational the discussion is, the better we’re going to be at avoiding the unintended consequences. “

He argues that the industry can evolve to eliminate market swings, such as those caused by a false tweet last year and a misplaced finger in 2010.

“Every industry as it automates and becomes more efficient through the use of technology runs into issues.  It’s how you respond to those issues and how you continue to strengthen the infrastructures of the marketplace is what really matters,” Nabicht said.

The founding firms of the lobby group are Allston Trading of Chicago,  Tower Research Capital LLC and Hudson River Trading LLC, of New York, and Quantlab Financial LLC of Houston.