Burton Malkiel: Relax, High-Frequency Trading Is Perfectly Fine

A Random Walk Down Wall Street

Much misinformation has been spread concerning high-frequency trading and related techniques. There is concern that an exclusive group of high frequency traders will be able to trade before others because of the information they obtain from flash orders and get better prices at the expense of retail investors. In reality, flash orders are only a small part of high frequency trading and the SEC has proposals to eliminate the practice. Vanguard has never allowed its orders to be flashed and all of the institutional investors we have spoken to claim that they also opt out of flash orders.

There is also the misperception that high-frequency traders are speculators who move markets to extremes. In fact, the vast majority of high-frequency trading involves looking for very small arbitrage opportunities, as between futures and cash markets or between the prices of exchange traded funds and their net asset values. These actions do not create volatile markets, they close gaps across markets and increase market efficiency. Indeed, in a different era, if market makers had computers with today’s computing power, their activity would have produced similar results…

Read the whole thing at the FT >

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