The government shut down continues while the American public anxiously awaits a resolution. Unless Congress raises the debt ceiling by October 17, the U.S. government will default on its debt. For the securities markets, this means market chaos, which provides a feeding ground for high frequency traders.
High frequency trading (HFT) uses complex computer algorithms to analyze multiple markets and trade high volumes of stocks, moving in and out of trades in fractions of a second. For high frequency traders, fortune favors the speedy. Computers generate returns in a manner that human beings simply cannot, leaving ordinary investors aghast. The question remains, does high frequency trading help or hurt our markets? On one side of the debate, proponents of this practice argue that HFT provides liquidity in the market. On the other side, critics blame HFT for market disruption and see the sophisticated technology as providing an unfair advantage to traders.
The Securities and Exchange Commission has been fighting to keep up with the technological advancements on Wall Street and research just how much of an advantage traders acquire through the use of such technology. The SEC is planning to release a public website containing data-driven analysis of trading patterns, increasing accessibility to the obscure patterns of high frequency trading. The data collected will also aid the SEC in closing the technological gap between this regulatory agency and high frequency traders. Although the SEC continues to weigh the actions it should take, if any, against high frequency traders, it is not as quick to blame HFT for market crashes as some of its critics are. SEC Chairman, Mary Jo White, in a speech on October 2nd, noted that although there is an increased risk of technology failure as trading systems become faster and more complex, high frequency traders are not to blame for the market problems of the last few years.
Despite the division between the supporters and the critics of HFT as a general topic, most can agree that when markets are volatile and there is a large trading volume, high frequency traders come out to feast. The last time that Congress came to the brink of a debt default, in August 2011, high frequency traders reaped the rewards with some of the highest profits since 2008. Since then, however, the market gradually stabilized, leading many to report on the fall of HFT. That changed when the government shutdown was announced on Tuesday, October 1. In light of the shutdown and the impending debt crisis, high frequency traders are experiencing a revival. The brinkmanship in Congress means that investors will panic, the market will grow more volatile, and high frequency traders will flourish.