Polar Opposites Debate High Frequency Trading

There's no topic more polarizing in U.S. capital markets right now than the value of high frequency trading. As the SEC Roundtable took place yesterday examining U.S. equity market structure, CNBC moderated a debate between two panelists on the question of whether high frequency trading should be slowed down.

Andrew Stoltmann, a securities lawyer and partner at Stoltmann Law Offices, argued that something needs to be done, insisting that the hot traders, or the high frequency traders, whatever one wants to call them, really pose a systemic risk to retail investors.

Referring to the 1,000 –point-drop on May 6th, Stoltmann said, "We still don't understand what happened." So because he doesn't understand HFT, he leaped to the conclusion that it should be banned, not regulated, not slowed down, but simply eliminated. "There's no redeeming quality when you have people trading in milliseconds and in microseconds. Ban it! It poses too big of a risk."

Countering this view, CNBC's anchor pointed out that while prices fell drastically, and no one is sure why, almost as quickly as they went down, they went back up, suggesting that the market worked like it was supposed to.

That created the perfect opportunity for Ilene Aldridge, a quantitative portfolio manager at Able Alpha Trading—who is a strong advocate of HFT— to jump in. Aldridge attributed the opposition to HFT to peoples' resistance to new technology, adding that, "We see this time and time again." Aldridge cited 1892, a year when thousands of Americans petitioned the U.S. Congress to ban trading in U.S. futures. The market's drop was blamed on useless speculative activity that was riling prices in commodities and hurting ordinary investors.

Instead of limiting HFT, Aldridge proposed requiring brokers to maintain a log of all transactions, so when something like May 6th happens there is a way to reassemble the order flow.

But Stoltmann repeated his view that there is positively no redeeming value in high frequency trading. "What are we supposed to sit for the market to crash 20% a day or 30-% a day?," he asked.

While Stoltmann recommended banning the practice, Aldridge disagreed, explaining that if high frequency trading in equities was banned, the trading would intensify in foreign exchange because it's possible to create synthetic equities in forex "If you ban trading in equities, it be reflected in foreign exchange in no time, " said Aldridge, adding, "And you can't regulate it because otherwise you're intervening with monetary policy."

Next, CNBC's anchor raised the issue of implementing an audit trail or electronic paper trail to trade all of the high frequency and equity trades. The anchor pointed to a lack of accountability among the exchanges, noting that Nasdaq may have such a system and CME might have one, but there is no market-wide SEC surveillance system. Aldridge agreed this was part of the solution, noting that the Futures Industry Association has a plan to create a communications standard that would track the risk of each trader.

In the end, Stoltmann still insisted that HFT is problematic and the remedy was to get rid of it. Stoltmann agreed with the CNBC anchor that regulators are behind the curve, and are always chasing the latest trading technology trend. Contrary to public opinion, Aldridge praised the job the SEC is doing, which she said is staffed by quality people with PhDs who understand what is going on. Imagining a world without HFT Aldridge, said: "You'd see huge bid-ask spreads. In many cases, people would not be able to liquidate their positions. "You wouldn't find somebody to trade with on the other side," Aldridge said.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio