1. High-Frequency
Traders
New insiders on Wall Street ?
{
Carmen Badali , Peter Sidhu,
and Pierre Urier-Cattoire

2. A Trading
Experience
{ 4 months on Investopedia
~ $66,000

3. {

4.  Introduction
 The advantages of HFT
 The disadvantages of HFT
 Summary, Recommendations and Conclusion
Outline

5. A question that sometimes drives me hazy: am I or
{ are the others crazy?
Albert Einstein
Introduction to High-
Frequency Trading

6. { Because racing is about being the fastest
The advantages of HFT

7. Quick timeline
 France, 12th century: courtiers de change, the first brokers
 Traders have always tried to be the fastest
 1998: HFT is proposed by Bernie Madoff in front of the SEC
 2010: 70% of trades in the US, 2% of traders

8. The New-York Times:
“Nearly everyone on Wall
Street is wondering how
{ hedge funds and large
banks like Goldman Sachs
are making so much
money so soon after the
financial system nearly
collapsed. High-frequency
trading is one answer.”
“The fair evolution of
competition on financial
markets” by Goldman
Sachs and others
Greater liquidity

9. Price discovery
{ Reduction in market
volatility
Economies of scale in
trading (order latency)

10.  Brings volume and
liquidity to markets  Reduce risks
 The advantage of  Reduce bid/ask spread
microseconds over “Fill the gap”
milliseconds/seconds
 Enhancement of
 Reducing commission competition
prices
Pros of HFT for short term
positions

11. { Bombing the market
The Disadvantages of HFT

12.  Programmed algorithms beyond human
control
 Flash Crash
 Unfair advantages through flash trading,
computer technology
 Lack of transparency – public doesn’t have
fair access to information
 Dark pools
 Regulations and standards for high-
frequency trading lacking
The disadvantages of HFT

13.  A large single trade by a financial company
triggered algorithms to buy and sell
simultaneously, which sent stocks into a spiral
beyond control.
 Investigations by the U.S Securites and
Exchange Commission concluded that at this
time the market is too fragile and fragmented
to handle such technology
 There is the speculation that a crash could
happen again in the future, but may not repair
itself
Flash Crash – May 6, 2010

15.  Flash Trading – component of high frequency
trading
 High-speed trades that give a group of high-
frequency traders trading information a in
advance before they are entered into the entire
market to be filled
 Provides unfair advantage to only a handful of
investors with access to the technology, or
ability to pay for it
Unfair Advantages

16.  Advantages given to flash traders creates a two-
tiered market in which a certain class of traders can
unfairly exploit others
 Dark Pools – Large groups of stocks connected to
other networks, which allow traders to move shares
through flash trading without announcing the
transactions on the open market
 Provides ability to anonymously trade, making it
difficult for the public to get accurate prices
 Traders involved receive an advanced preview of the
intentions of larger investors before the public
Lack of Transparency

17.  Hard to see who the high frequency traders are,
what they are trading, and when they’re doing
it
 Regulators and Investors are losing faith in the
trading system, unsure of accuracy
 It is still questioned whether it’s the high-
frequency trading that’s unstable, or the
algorithms
Regulations and
Standards for HFT lacking

18. { The world as we knew it
Summary,
Recommendations
and Conclusion

19. 1. HFT causes volatility when it trades
2. HFT causes volatility when it DOESN’T
trade
3. HFT generates massive amounts of profit for
financial institutions
4. Technology gives HFTs an unfair advantage
over individual investors and institutional
investors
5. HFTs who use direct feeds can “predict the
future” a few milliseconds in advance, or
“anticipate” investor orders
Statements made about HFT

20. { Pro’s
{ Con’s
 Unpredictable
 Greater Liquidity Consequences of
 Decreased Latency Algorithms / Too Risky,
Ban It
Periods  Lack of Regulation and
 Price Discovery Transparency
 Vacuuming up Pennies –
 Reduction in Market Money, not Value
Volatility  Flash Trading
 Unfair Technological
Advantage
HFT Summary

21. { High-frequency traders are not Wall Street insiders;
instead they provide a valuable service as the new
market makers.
High-frequency trading should not be banned.
Recommendations And
Conclusion

22. Questions?