High Frequency Trading is Highly Beneficial

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High Frequency Trading is Highly Beneficial

• Presented by Lavleen Goyal Eric Lepouchard

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What is HFT?

• Primary form of Algorithmic Trading
• Use of sophisticated technological tools and
  computer algorithms to rapidly trade securities

San Francisco design firm Stamen teamed up with
Nasdaq to visualize the frenzy of automated
trading. This is one minute of bids and offers on
March 8, 2011
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Decision Criteria for Investors
Main Street is the great beneficiary () We are
better off with high-frequency trading than we
are without it. Jack Bogle, Vanguard founder
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Improved Bid-Ask Spread
Bid-ask spreads have fallen by an order of
magnitude since 2004, from around 0.023 to 0.002
percentage points. On this metric, market
liquidity and efficiency appear to have improved.
HFT has greased the wheels of modern finance -
Forbes
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Reduced Transaction Costs
U.S. regulators are unlikely to put rules in
place that would harm high-frequency trading
(HFT) as doing so would make trading more
difficult and expensive for all investors -
Robert Greifeld CEO, Nasdaq OMX Group
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Increase in Liquidity
High frequency trading is introducing an
outstanding level of volume to the market -
MarkIT
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Does NOT affect Volatility
Algorithms and high frequency trading do not
affect price volatility - Futures Industry
Association
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Myth 1 HFT is Too Dangerous
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HFT is Human Progress

• Financial Technology evolved from Pigeons to
  Petabytes
• Financial Data produced on a daily basis is
  larger than the information contained in all
  books on Earth
• Peng Zhao
• Co-head of Quantitative Strategies
• Citadel Investment Group

Tech Specs from the Financial Industry are the
stuff of Science Fiction Senior
Executive Ericsson America
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Myth 2 HFT is Front Running
High-frequency trading is a growing cancer that
needs to be addressed. Charles Schwab, chairman
of Charles Schwab Corp.
Broker
Market

• Front Running the unethical practice of a broker
  trading an equity based on information from the
  analyst department before his or her clients have
  been given the information.

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HFT Is Fair and Efficient

• HFT firms are small shops with no client, they
  typically trade with their own money, they cannot
  front run anyone
• HFT firms trade based on public information
  making market more efficient
• By reducing spreads, HFT firms take profits away
  from traditional brokerage firms, reducing costs

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Myth 3 HFT needs Regulation

• Tax, make that a little bit more expensive and I
  think you will get rid of that white noise
• Sheila Bair, Former Chairperson FDIC

The capital markets are a public good, much like
a highway () We need to have clear rules about
the speed limits and who can use the HOV
lanes. Sen. Jack Reed (D-R.I.)
The market is rigged Michael Lewis, Flash Boys
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Their True Colors?

• There should be a lifetime ban on regulators
  working for financial institutions they have
  regulated
• Sheila Bair, Board Member of Banco Santander

Michael Lewis clearly misses the fun and glory
of the trading floor during its years of excess
when he was a trainee at Salomon Brothers Manoj
Narang, Tradeworx
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HFT is Highly Beneficial

• HFT Benefits investors
• Better execution price
• Lower transaction costs
• Increase Liquidity
• HFT does not affect market volatility
• HFT is Progress in the Financial Industry
• HFT is Fair and Efficient
• Most talk of HFT regulation is ill-advised
• THANK YOU and TRUST YOURSELF

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Why Liquidity Matters

• Financial crisis 2008
• Interbank lending market collapsed due to
  counterparty risks
• Credit markets froze, liquidity disappeared

• In 2008, TED spread dramatically widened due to
  lack of liquidity
• In general, liquidity affect prices and market
  performance