The
Economist has a piece that advocates a cautious approach towards high-frequency
trading. It argues:
Economist has a piece that advocates a cautious approach towards high-frequency
trading. It argues:
This
newspaper seldom finds itself on the side of restraining either technology or
markets. But in this case there is a doubt whether the returns justify the
risk. Society needs a stockmarket to allocate capital efficiently, rewarding
the best companies with higher share prices. But high-frequency traders are not
making decisions based on a company’s future prospects; they are seeking to
profit from tiny changes in price. They might as well be trading baseball
cards. The liquidity benefits of such trading are all very well, but that
liquidity can evaporate at times of stress. And although high-frequency trading
may make markets less volatile in normal times, it may add to the turbulence at
the worst possible moment.
newspaper seldom finds itself on the side of restraining either technology or
markets. But in this case there is a doubt whether the returns justify the
risk. Society needs a stockmarket to allocate capital efficiently, rewarding
the best companies with higher share prices. But high-frequency traders are not
making decisions based on a company’s future prospects; they are seeking to
profit from tiny changes in price. They might as well be trading baseball
cards. The liquidity benefits of such trading are all very well, but that
liquidity can evaporate at times of stress. And although high-frequency trading
may make markets less volatile in normal times, it may add to the turbulence at
the worst possible moment.
The
argument appears to highlight the tendencies of high-frequency trading to
generate more short-termism in the market. This is to be contrasted with the incentives
of long-term investors, which the closing observations in the Economist piece
quite elegantly capture:
argument appears to highlight the tendencies of high-frequency trading to
generate more short-termism in the market. This is to be contrasted with the incentives
of long-term investors, which the closing observations in the Economist piece
quite elegantly capture:
The
most successful investor in history, Warren Buffett, says his ideal holding
period for shares is for ever. So it surely will not do much harm to investors
if, on occasion, they have to wait a second or two before dealing.
most successful investor in history, Warren Buffett, says his ideal holding
period for shares is for ever. So it surely will not do much harm to investors
if, on occasion, they have to wait a second or two before dealing.