In a FT article Anne Richards, the CIO of Aberdeen AM, stated that some HFT-firms never had a down day and as such something must be wrong. By her standards there must be something wrong with the bakery I go to around the corner. They make a profit every day!
Seriously, it’s a very weak argument coming from Anne Richards by any standard but hey, it sticks! Why? Because people can recognise and understand it.
Recent discussions about HFT* have been very technical and have focused on regulation. Regulation is seen by people opposing HFT as the way to slow down its growth. They see HFT as one of the main causes of the current financial crisis and even worse, HFT has profited from it. Regulation should, in their view, be designed in such a way that HFT has no speed advantage over any other stock exchange participant.
This way of thinking is very one-dimensional and goes beyond what competition actually is. Competition happens when you belief that you can do a better job than your competitor. This can be in terms of quality (e.g. research) or quantity (e.g. big bank vs. small bank). Speed is just another way to compete. Some will argue that in order to get the point where speed can be used as an advantage, you need investments into technology that no ordinary man can make. That is certainly true. However, that is also true for other competitive advantages. Take economical research. No ordinary person can research the economy of a country the way a bank or large broker can.
The debate should be about how HFT affects the ordinary person in its daily life. My personal opinion is that all in all the effects for an individual are almost negligible. Nobody I know says that the quality of his daily life has improved thanks to HFT. Or has become worse!!
Nevertheless people seem to have a strong (negative) opinion about HFT. It comes down to this: HFT are a bunch of rich people who have become even richer by stealing from the average man or woman. It’s never: HFT are successful businesses that have created thousands of jobs and at the same time have made global markets a more level playing field. Why is that?
The social relevance of HFT is not clear to people. Social relevance is about legitimization. Legitimization is not tangible and hard to quantify. And this is where it becomes difficult. It’s difficult because there seems to be no connection between HFT and the average person. However, there is a connection. It’s just not clear! I my view HFT should start explaining what its impact on daily life is. It should make clear what its role is as compared to banks or asset managers.
So why should HFT care about social relevance? Because without it you’re seen as socially obsolete and as a free rider. The reason of being for any company is founded in society. So explaining what the role of HFT is, is important. The main opponents of HFT have done a better job when it comes to this. E.g.: IEX , the exchange founded by Flash Boys’ hero Brad Katsuyama, has been able to attract supporters by pointing at the value it brings to society by attacking the obvious weak points of HFT.
FIA EPTA and other pressure groups have contributed a lot to the awareness about HFT in the financial world but have made limited effort to explain the role of HFT in society and the real economy.In order to do this some self-examination and reflection is probably in place. Not everything HFT has been doing is ethically acceptable (true for every industry).
The next step is to go public in mainstream media and participate actively in the debate. HFT’s opponents are doing so, so why should HFT not do so?
*HFT can just as well be replaced by prop traders in this text. I know...It’s not the same thing!