High-Frequency Traders can’t seem to catch a break – in public opinion, that is. Wherever they go, they are blamed for all manner of ills in the market. To be fair, they haven’t done a very good job (or put in much of an effort at all) at managing their reputation. There was the Flash Crash, the Knight Trading fiasco, and a long list erratic behavior throughout markets. Even some corners of the managed futures community have begun blaming them for recent lackluster performance.
So we were terribly (un)surprised to learn this morning that HFT has gone and made another enemy: Forex traders. The Wall St Journal reports:
Hedge fund GSA Capital Partners LLP has accused Thomson Reuters Corp., owner of a major currency-trading platform, of being too lenient in sanctioning a high-speed trader. In an act of protest, GSA, a large customer of Thomson Reuters, said it is refusing to post prices of its trades on the firm’s system…
The dispute demonstrates the tensions within the currency market as high-speed trading expands. Regulators leave much of the policing to platform operators such as Thomson Reuters and ICAP PLC’s EBS. But as the number of high-frequency traders rises, many of these trading platforms may be struggling to keep pace, said Christopher Nagy, a consultant who formerly handled the routing of orders for brokerage firm TD Ameritrade Holding Corp…
High-frequency traders have populated the stock market for years, but fast trading in currencies started to gain traction only recently. For years, trades were often done over the phone between two traders who knew each other. That led to a clubby world where rancor was limited. Now, high-frequency trading makes up about 40% of the currency market, nearly double the share in 2007, according to consultant Aite Group. In the stock market, high-frequency trading makes up about two-thirds of volume.
High-Frequency Traders are becoming less welcome than lepers in some circles. As they expand into new markets, they’re making enemies almost as fast as they make cancelled orders. With all the animosity, we’d be shocked if some kind of regulatory action against HFT wasn’t on the horizon, but that might turn out to be bad news for everyone.
As we noted yesterday, some legislators are proposing financial transaction taxes – and one is poised to go into effect in several EU countries – as a measure to cut down on HFT. Market regulation is obviously needed, but when regulators step in without a clear understanding of the situation or the consequences of proposed solutions, laws can end up generating new problems worse than the ones they set out to solve. Here’s hoping someone can devise a way to settle the controversy over HFT without hampering our entire financial system to do it.