HFT, much ado about nothing?

Let's kick off the new year with a fan favorite, HFT.

It's a safe prediction to state that the pro's and cons of HFT will continue to be discussed in the new year. And it's also safe to predict that we won't reach a definite agreement on its values either this year. Most of the arguments are well known by now and are a repetition of a repetition.

At brokerdealer.nl we're always looking for the nuance of things and a 'fresh' perspective. That can usually be found when someone representing 'the other side of the aisle' leaves the rhetoric for what it is and starts thinking for himself.

That is what makes this opinion article on Morningstar interesting. The author (a Morningstar fund analyst) does believe that HFT takes advantage of an opportunity, questions how much liquidity HFT adds (and stays relatively neutral) but seriously wonders what all the fuss is about.

The author argues that the size of the fund industry and the profits it generates make HFT trading look like small potatoes:

In the grand scheme of things, there’s not a lot of money to be made from high-frequency trading--an estimated $3 billion annually, on roughly $40 trillion of stock market trading volume, meaning that HFTs’ aggregate revenues are something less than 1/10,000th of dollars traded. For perspective, mutual fund company revenues are about $90 billion, making the fund industry far, far larger than HFTs.

The author goes on and questions the argument that HFT is hurting clients, or at least not as much as the fund managers themselves hurt clients:

It's a bogus contention.

For one, the amounts are small indeed. The Journal of Finance article estimated that HFTs made about $7 for each $100,000 of stock trades. That figure has since declined, to possibly as little as one-twentieth of a cent per share. Thus, a retail investor with a $500,000 stock portfolio and an annual turnover rate of 40% would have indirectly paid about $14 to HFTs a few years back and a lower amount today. To once again place this into perspective by citing mutual fund expenses, the annual dollar fees paid to Vanguard on a $500,000 investment in its low-cost  Vanguard 500 Index (VFINX) is $850. 

Plus, to the extent that HFTs have helped to reduce bid-ask spreads on stocks--an argument that even Swensen did not directly deny--that change is to the benefit of all investors, the lowly retail buyer included. It's quite possible, if not directly provable, that HFTs have lowered the cost of trading for everyday investors. If that is predatory behavior, then by all means, prey away.  

It's nice to see someone putting some perspective on things. Naturally the author gets burned by readers in the comment box, but he has our respect. Read the full article here