Re: Better Idea
"Over that time, markets have evolved dramatically through the processing power of today’s technology – with execution times measured in milliseconds and microseconds – as well as widespread retail investor participation in the markets, decimalisation, the exponential growth of daily trading volume, and the for-profit status of the securities exchanges."
Most people raging against HFT have a picture of electronic trading that is somewhat unrelated with reality.
The speed of transaction has been driven up by many factors that have little do with people making money from micro price movements. Admittedly HFT has seen a lot of purely parasitic trading in the past, however through regulation and exchanges changing their pricing structures to discourage huge volumes of un-matched trades being blasted through their infrastructure, this activity has declined sharply.
The move away from open out-cry exchanges (loud wide-boys in loud jackets trading by shouting and hand signals) to electronic trading had allowed more transactions to be completed per trading day. This has allowed decimalization of the market, so before when shares or instruments could only be trading in large lots, typically 100,000 of whatever you were trading.
Trades can now be performed for any volume and matched against a counter-party directly as a partial fill. This has been made possible by the speed and accuracy of electronic systems.
By removing the need to have chains of brokers to aggregate investor traders in lots, this makes it practical to facilitate direct market participation by small and retail investors.
Before if I wanted to invest in something, I would by unlikely to afford a standard lot (100,000) of whatever, so I would go to a broker, they would look at their house book, if they had the shares in their inventory they would sell me a number of shares at a price that results in a profit for them, otherwise they would buy a lot on the market and sell me the required quantity, they would of course change a premium on their purchase price to cover their commission and risk (they would be left holding the remaining shares).
Also instead of a few national exchanges there now a multitude of exchanges, MTFs and ECNs (all really the same thing at a basic level, but there are different regulatory rules).
These private exchanges need liquidity for attract customers, so they bring in traders called Market Makers, these folks are obliged to provide a bid/ask price within a certain spread for all the instruments they are contracted to 'make the market' for, an exchange will have multiple market makers all competing against each other for trader business so the real time competition between market makers has. dramatically reduced bid/ask spreads.
Most of the the responsibility for the credit crunch was down to misrepresentation of their credit risk by banks, and had nothing to do with electronic trading, high frequency or otherwise. Of course HFT is not generally understood, so it makes a good scape goat.
Banks begrudgingly accept it is there and they have no choice. HFT has already resulted in significant removal of middle men from the trading business, and threatens the banks oligopoly by allowing greater market participation.
Politicians always need something to blame other than themselves, so rather than admit to massive regulatory failure in credit markets, they would rather blame something few people understand.
In my view the benefits of high performance electronic trading out weight the downsides.
I await your down-votes.