HFT is a practice carried out by many hedge funds, banks and proprietary firms using sophisticated computer programs to send high volumes of orders at near light speed, executing short-term trades to make markets or capitalize on price imbalances. HFT makes up more than half of all US trading volume.
Last week, New York states attorney general Eric Schneiderman said in a speech that US stock exchanges and alternative trading platforms provide HFT firms with unfair technological advantages that give them early access to key data. Shares of Nasdaq, the third-largest US stock exchange operator by volume, fell as much as 4% during on the day of Schneidermans speech, its biggest single-day drop since April 2013.
HFT firms pay to locate their computer servers within the data centres of exchanges, and for extra network bandwidth and high-speed switches that give them pricing, volume and order information ahead of others as they race to take the other side of profitable trades, which they then quickly trade out of.
Proponents of HFT argue that the practice has led to a more efficient market and a reduction in bid-ask spreads, benefiting all investors. A ban on HFT would be unlikely, as that would make it harder for investors to get their trades filled, and it would lead to wider bid-ask spreads, Greifeld said.
Analysts and investors during a presentation in New York on Thursday.
People are going to be very hesitant to put in policies that remove liquidity from the market. You could argue whether the liquidity is always there when you want it, but there is still liquidity in the marketplace, he said.
HFT critics say the liquidity provided by these firms is fleeting and that in times of stress, when the liquidity is needed most, many HFT firms pull back from the market.
In May 2010, the market plunged nearly 700 points in a matter of minutes before sharply rebounding, shaking the confidence of investors in the soundness of the market. A regulatory report found that HFT was not responsible for causing the so-called flash-crash, but that the problem was exasperated as HFT firms quickly exited the market.
If curbs were placed on HFT, the wider spreads would present other opportunities that would be fundamentally advantageous for Nasdaq, Greifeld said, in response to one of three questions from analysts on the possible impacts of any new HFT legislation.
The point is, I dont see anything happening in the near term and I think when the regulators and the people who know the markets and have the economic data in front of them, they are going to be loath to take liquidity away from the market. I have yet to see that happen in any regulatory structure around the planet, Greifeld said.