5 Reasons Why High Frequency Trading Is Overhyped


You’ve visible the headlines, listened to the pundits and acquired the interesting novels about all of the intrigue, greed, and evil that is High-Frequency Trading. Over the remaining several years, HFT has taken the sector of Wall Street through the storm and has precipitated no scarcity of controversy among the various marketplace participants. HFT is the method of the usage of laptop applications to shop for and promote securities with lightning speed, executing heaps of trades in a second, a great deal to the chagrin people mortals who’re limited by using our own reflexes. But is High-Frequency Trading simply the foundation of all evil? Below are five arguments for why HFT is greater than only a vessel for greed and is in fact just any other device like every other:

1: Controversy is an enterprise

To get it right out of the way, corporations that utilize HFT aren’t the only businesses being profitable off the phenomenon. At the risk of sounding like a political nutcase, which I’m now not I swear, news stores are not always out for reporting the most precious facts. Most of the revenue for these stores come from classified ads and royalties, that are all tied to the range of visitors these outlets have. In many instances, in lieu of spending time and power to record on new principles all of the time, it is less complicated to sensationalize current arguments. This controversy isn’t limited to the news stations, however, and many writers are gaining prominence by discussing (examine: crucifying) HFT as a practice. Whether or now not humans need to be able to make money with this generation is debatable, but is making the most of the argument any more legitimate?

2: It’s the next logical evolution in trading

In the wild global of making an investment, there are numerous ways to approach research. The two most vast classes of due diligence are known as fundamental evaluation, and technical analysis, and are usually stressed. Fundamental analysis is the manner of looking at what a company truly does, how the firm performs, the enterprise performance and so forth. And you decide with the expectation that you expect an increase. Fundamental analysis is regularly very time consuming, monotonous, and no longer absolutely glamorous. Fundamental analysis is, however, a completely robust approach of valuing investments, and it’s miles this creator’s private belief that most a hit investors perform some degree of fundamental analysis in their choice process.

Technical analysis is the subject up for debate in this newsletter even though, and technical analysis is probably what springs to mind while you consider the stock marketplace. In a strict dictionary definition manner, a technical evaluation is the try to derive destiny fee movements from past behaviors the usage of any range of equipment or styles. Hollywood does a quite exact activity of showing the action-packed procedure in movies, with investors looking at charts and speak approximately driving developments now not in contrast to surfers riding waves. Technical evaluation is frequently dismissed in academic settings (I.E. Undergraduate finance classes) due to the reality that it’s far enormously new, and unproven. In the exercise, however, under the right circumstances, some achievement may be had by employing the proper technical tools whilst investing. For example, even as many buyers might also prefer essential analysis to select stocks, they then use technical evaluation to decide while to shop for or sell.

High-Frequency Trading is the next evolution of technical evaluation. Most investment brokerages permit character investors (called retail traders by means of the massive corporations) to rent tools to analyze stocks, and HFT is clearly the system of doing this analysis clearly speedy on extra shares. This doesn’t mean that HFT is the first-class technique, only this is the in which the era goes. The argument against HFT is that mid-sized companies and retail traders do not have get admission to this technology. The flaw in this argument is that era is heading in this path regardless, and over time it will be greater reachable for others. We have not stopped air tour because the commercial railroad tour feels terrible, and we may not be stopping tech advancements for the equal reason.

3: You should not be day trading anyway

I’ll be stepping on a lot of toes for this unique segment. The long and short of it’s far, in case you are a small-time retail investor, you should not be day buying and selling anyway. I use the time period day buying and selling in the sense which you are shopping for and selling shares over short time durations to try to beat the marketplace. I can nearly assure you that you may lose money doing this, even I even have personal revel in this. The large firms have got admission to a long way greater sources than you do, and HFT is just one extra tool within the toolbox they have got. Instead of sweating the information of whether or not an inventory went up or down.013% these days, because of the HFT motion, you need to be searching at long time investments. Or higher yet, put your money in a mutual fund. Sure mutual price range or different retirement vehicles aren’t glamorous, get a rich brief, rock and roll buying and selling lifestyle you predicted, but it’s better than the opportunity. If you cannot dedicate all of your time and strength to the marketplace, you’ll lose your money to someone who is clocking in all the hours you are not.

Four: What approximately the advantages?

I day-traded for a while, with blended outcomes, I by no means felt cheated with the aid of HFT. The truth is HFT offers extra “consumers” or “sellers” of security with a view to interact with. This extra movement means that when you region an order it receives crammed nearly instantaneously. This may additionally by no means were a trouble in case you simplest alternate stocks that already get plenty of attention (perhaps you most effective trade the blue-chip Dow stocks) but what about lesser regarded stocks? If nothing else this movement offers more motion in small to mid-cap so one can earnings off of. Those charge swings occur out of nowhere, it’s due to the fact shopping for and selling is in a regular war to move charges up or down.

Five: The Market is already rigged

Perhaps the most frequent argument pundits make is that HFT is that by some means this new improvement has made the playing area choose the large boys. This unfair era has made it hard for the little guys to discover fulfillment. The reality of the problem is that the marketplace has in no way now not been rigged. I don’t imply this in the Illuminati conspiracy sense, but extra in the whole concept that the markets will by no means be fair to the much less prepared. The stock marketplace isn’t a clean slate each morning whilst it opens, it’s miles marinated in all the news and activities going on at all times. Any investor who does not take some time to do any type of due diligence is going to get slaughtered. What’s greater, the massive corporations are always going to have a bonus, no longer because of a few sets of rules that trades quicker than you, but due to the fact they dedicate extra manpower than you to the marketplace. You may be spending time doing research, and building the pleasant method viable concerning one specific inventory, however, those big corporations are doing the equal element, and they may have more than one analysts protecting the same safety, already giving them the advantage. You are trying to compete with professionals who make it their business to be higher than you. Picture stepping directly to a soccer discipline only to discover that the opposing team is from the NFL, it is already rigged and also you possibly might not win. Complaining that they’re sporting higher cleats than you and may flow faster due to it isn’t always going to trade the fact that they spend all of their time gaining knowledge of their craft.


I don’t assume to win the hearts and minds of the people with a handful of paragraphs, however, I do wish you now realize that it isn’t all so black and white as you may have heard. Yes, High-Frequency Trading is controversial, but it wishes to be mentioned in a civil manner and now not heralded as the approaching of all matters evil. You can also have this grand concept approximately how the markets are fair and just, and that even the little man has a shot to make it huge, but the reality is a way more complex. The markets aren’t designed to be truthful, or excellent in any way. The quality way to avoid the “risk” of HFT is to show it around and try to broaden a strategy to benefit from it, due to the fact at the same time as rules can be underway to regulate it, Pandora’s Box has already been opened and it isn’t always going away.