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The furore over the role of high-frequency trading (HFT) in financial markets is the latest in a long series of concerns over the impact of innovation by those who believe the controllers of technology gain unfair advantage.
From the advent of telegraph and ticker tape to computers and algorithmic trading, the critics follow a well-trodden path.
But it is important to distinguish between the existence of technology in financial markets and the tasks which technology is assigned to perform.
One key complaint about HFT is that it breaches existing rules on market abuse and front-running. Even if that were the case, the problem would not be the technology, but the people programming it.

	Traders are simply being outcompeted incredibly quickly by new technology
Market abuse has always been illegal, whether occurring in an old-fashioned open-outcry exchange or in a modern, cutting-edge electronic realm. The complaints, even if the accusations are true, are really about the failure to enforce existing rules.
The counter-argument is that HFT does nothing illegal or unusual. They are essentially market makers (or liquidity providers as they now prefer to call themselves) and they have always existed. They are the ones prepared to be counterparties to trades nobody else wants.
It is also true to say that market makers charged a fee for that service, namely the spread - or the difference between market value and the price just below it which the market maker pays. Market makers capture the spread, market takers pay it.
When faced with a large seller, a market maker would naturally reduce the price at which he was prepared to buy - markets, after all, are competitive venues and market makers have never been charitable enterprises. This was true 100 years ago and it is true today.
It is also true that in any market, there must be a balance between market makers and market takers.
A market maker would naturally be expected to reduce the price bid for a security if a large volume of selling interest is believed to be in play. Other market makers would be equally within their rights to bid slightly higher if they thought they could still make a profit on the deal. Competition between market makers has the natural effect of shrinking the spread that market takers pay for liquidity.
This, the HFT industry would argue, is the unappreciated benefit that their technological advances have brought to the industry. Spreads have tightened and transaction costs have collapsed. In aggregate, the fee extracted by market makers for liquidity provision has declined substantially. Equally substantial is the change in the profile of the market makers.
When people complain about being "front-run", what is actually happening is that they are being "outcompeted" by other market makers. Everyone would prefer to buy on the bid, not the offer. But in order to do that, you are in competition with the market makers.
As soon as an order is placed in the market, it is visible and therefore public information. A few decades ago, that involved someone shouting across a trading floor. Today, it is an electronic command. A human pressing a button on a keyboard can be fast, but nowhere near as quick as algorithmic market makers, which react in nanoseconds. That may feel like being front-run, but in reality it is simply being outcompeted incredibly quickly.
The growing dominance of electronic execution reflects the fact that the majority of participants finds it beneficial. It has led to changes in the nature of the liquidity pools, the variety of participants within them and the way in which they react to events and actions. Analytical tools must also adapt.
Markets are constantly evolving due to their competitive nature. Market takers will become better at hiding their intentions from the algorithms. Market makers will respond accordingly.
But one thing won't change - they'll all be trying to beat each other.
This is why we should instead be looking at the regulation around such technology, not the technology itself - which will always continue to develop, advance and adapt.
Guy Wolf is global head of market analytics at Britain-based commodities broker Marex Spectron


No easy solution to new market tech like high-frequency trading

From ticker tape to computer trading, there is a difference between technology in markets and the tasks it performs. Photo: Bloomberg

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Markets & Investing

Controversy over tech innovations is nothing new, as is the case with high-frequency trading


The furore over the role of high-frequency trading (HFT) in financial markets is the latest in a long series of concerns over the impact of innovation by those who believe the controllers of technology gain unfair advantage.


No easy solution to new market tech like high-frequency trading

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Controversy over tech innovations is nothing new, as is the case with high-frequency trading

Controversy over tech innovations is nothing new, as is the case with high-frequency trading