High-Frequency Trading – Does it Have a Negative Impact on Me ?

By | August 20, 2014

High-Frequency Trading (HFT) is a term that has been used a lot in recent years. Many traders blame their losses and their inability to make profits in the markets on it. I know traders who claim they lost a fortune on May 6, 2010, the day of the flash crash which was supposedly caused by High-Frequency Trading.

Whenever there was an unexplained sharp drop which was followed by instant recovery, the newspapers in those days used to call it a bucket-shop drive. – ROSO

So what’s this buzz all about? How does the fact that investment banks and hedge funds use High-Frequency Trading impact me as a retail trader? I think that it does in a positive way, by providing liquidity and narrowing the spreads. Just to give you an example, when I first got interested in the forex market, some 8 years ago, I remember the spread on GBP/JPY was 9 pips. It’s less than 3 pips now.  We can’t give credit to all that reduction to HFT, other things have had an influence over the years as well, but it played an important part.

Then why the negativity among retail traders towards HFT? And did those traders that I mentioned lost on May 6, 2010, because of it? To answer the first question, it’s very common to try to cast blame on something or someone when things don’t go your way. It’s the easy way out because it prevents learning. If something isn’t your fault, then there’s no reason for you to do anything differently.

People are always blaming their circumstances for what they are. I don’t believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and if they can’t find them, make them. – George Bernard Shaw

HFT is just the latest scapegoat added to a group generically called ‘THEY’ which supposedly causes almost if not all losses incurred by traders. Another member of this group: brokers, Draghi, Yellen, and so on.

The traders that were hit hard on May 6, 2010, that I mentioned before hadn’t put stop losses in place, on the very mistaken assumption that they wouldn’t want to get shaken out by a fake move. After receiving margin calls that day or seeing their accounts decimated they started saying that the market is rigged. That it wasn’t a ‘normal’ move, that the HFT did it. They refused to acknowledge that these ‘not normal’ moves have been happening once in a while for more than a hundred years.

To summarize, High-Frequency Trading might have an aura of secrecy and mystery, but it doesn’t have a negative impact on retail traders.