High-Frequency traders get a lot of flak from critics for figuring out strategies of other investors and getting hold of the trades first. Many academic scholars agree with the critics about the harm HFT causes to other investors.
The head honchos of investors like mutual funds and hedge funds efficiently disguise their plans by breaking the big stocks into smaller pieces and implementing them within hours or minutes. This move is an effort to avoid driving prices away from them.
The Expert Comment on the HFT Nightmare
According to two scholars Vincent van Kervel and Albert J. Menkveld from VU University Amsterdam HFT firms efficiently sell when the biggies are buying and buy when they’re selling all the while acting as passive market makers. They do so to simply facilitate transactions for others.
But when the big shots keep driving orders into the market for hours, HFT firms change their game plan. HFT mimic big investors’ trades which makes it more difficult for them to buy or sell stocks. According to Menkveld, high-frequency traders are clueless about the large orders that initially come into the market. But once they are sure that the order is persistent and has lasted long enough in the market, they go ahead with the order.
The two professors from VU University Amsterdam studied 5,910 Swedish stocks placed by 4 big investors and their trading from January 2011 to March 2013 and used it to monitor how 10 HFT firms behaved while these trades were carried out.
Insight on HFT in Michael Lewis’s ‘Flash Boys’
Michael Lewis after studying the global markets argued in his 2014 book “Flash Boys” that HFT firms used powerful computers and quick connections to exchanges to their benefit and were picking off from other investor’s trades. Professors van Kervel and Menkveld mention in their paper that HFT firms have the tendency to crowd into trades which severely affects big investors who get worse prices from their trades.
The paper also talks about the evolving market and its computerization. While some have a serious problem with HFT firms, others like a Bank of England working paper mentions, feel that the market is more efficient because of HFT. According to Menkveld, one important question for economists is whether HFT firms closely follow the actions and movements of the big investors that it ends up damaging the incentive for them to research assets.
Menkveld shared his two cents on the issue by stating “If I put in analysis and I find out that a stock is trading at a low price and the company deserves more capital, but instead with the very first order I send to the market everyone is jumping on it and immediately it changes to the new fundamental price, I am left with no incentive to do something that’s valuable to society”.
The head honchos of investors like mutual funds and hedge funds efficiently disguise their plans by breaking the big stocks into smaller pieces and implementing them within hours or minutes. This move is an effort to avoid driving prices away from them.
The Expert Comment on the HFT Nightmare
According to two scholars Vincent van Kervel and Albert J. Menkveld from VU University Amsterdam HFT firms efficiently sell when the biggies are buying and buy when they’re selling all the while acting as passive market makers. They do so to simply facilitate transactions for others.
But when the big shots keep driving orders into the market for hours, HFT firms change their game plan. HFT mimic big investors’ trades which makes it more difficult for them to buy or sell stocks. According to Menkveld, high-frequency traders are clueless about the large orders that initially come into the market. But once they are sure that the order is persistent and has lasted long enough in the market, they go ahead with the order.
The two professors from VU University Amsterdam studied 5,910 Swedish stocks placed by 4 big investors and their trading from January 2011 to March 2013 and used it to monitor how 10 HFT firms behaved while these trades were carried out.
Insight on HFT in Michael Lewis’s ‘Flash Boys’
Michael Lewis after studying the global markets argued in his 2014 book “Flash Boys” that HFT firms used powerful computers and quick connections to exchanges to their benefit and were picking off from other investor’s trades. Professors van Kervel and Menkveld mention in their paper that HFT firms have the tendency to crowd into trades which severely affects big investors who get worse prices from their trades.
The paper also talks about the evolving market and its computerization. While some have a serious problem with HFT firms, others like a Bank of England working paper mentions, feel that the market is more efficient because of HFT. According to Menkveld, one important question for economists is whether HFT firms closely follow the actions and movements of the big investors that it ends up damaging the incentive for them to research assets.
Menkveld shared his two cents on the issue by stating “If I put in analysis and I find out that a stock is trading at a low price and the company deserves more capital, but instead with the very first order I send to the market everyone is jumping on it and immediately it changes to the new fundamental price, I am left with no incentive to do something that’s valuable to society”.