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HIGH-FREQUENCY TRADING

The suspicious thing about financial conspiracy theories is that they are all alike. A “sophisticated” or “shadowy” investor makes pots of money in ways nobody quite understands. The indignant theorist casts aspersions on their methods, inserts a non sequitur regarding its effects and explains how this is frightfully unfair for the “little guy”. Cue political outrage. The latest involveshigh frequency trading (HFT) and so-called flash orders.

HFT is high-volume trading used by banks' proprietary traders and a new breed of electronic trading outfits. It relies on synthesising information faster than others using powerful computers, often co-located within exchanges. Flash orders are sent to certain traders in a market fractionally before being routed more widely. Its speed of execution can save traders money, if only a sliver of a basis point.

The effects of HFT, which perhaps accounts for 70 per cent of US trading volumes, are ill-understood. There are concerns that its users, as well as providing liquidity, probe the market to extract early information, meaning others lose out. Flash orders may increase that informational advantage.

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