Why High-Frequency Trading Supersedes
Floor-Based Trading?
Why should I route my orders through a high-frequency trading firm?
In present-day securities markets, when high frequency trading operations and floor based trading operations compete head-to-head, the results often favor high frequency trading. Despite the assertions made by critics, it is FLOOR based traders, and NOT high frequency traders who engage in unethical and wealth destructive practices. The advent of high-frequency trading allows market participants to exercise direct control over their orders by having the confidence in knowing that high frequency traders handle orders with precision. Large institutions that are concerned about the confidentiality of their orders should think twice before choosing to execute their order through a floor based trading operation. High frequency trading therefore appeals to market participants who no longer have trust in floor brokers and market-makers. Emotions and greed corrupt the minds of floor traders and influence them to engage in fraudulent trading activities. Concerns about increased corruption coupled with the need for reduced costs have led the New York Stock Exchange to invest several billion dollars in new high frequency trading operations to transition from its floor-based operations. For these reasons and more, high frequency trading operations trump floor-based trading operations in every way imaginable.
Will high-frequency trading increase my trading costs?
With the advent of high-frequency trading, bid-ask spreads on individual securities have narrowed and overall transaction costs have decreased. In a study by Professor Charles Jones, Jones proves that bid-ask spreads in individual securities have "decreased since the implementation of high-frequency trading strategies" (Jones). In 1997, before high-frequency trading was established, the minimum bid-ask spread for individual securities was $0.125; today, the minimum bid-ask spread is $0.01(Jones). That is a difference in $.115 which can add up to thousands in savings for the average retail investor trading in today's electronic markets. Also, unlike in high-frequency trading, competition in floor-based trading does not reward independent traders and mom and pop investors. In high-frequency trading, competition leads to even tighter bid-ask spreads and smaller trading costs. It doesn't get any better than that! In essence, high-frequency trading firms compete among each other to provide you with an affordable way to participate in the markets.
Does high-frequency trading allow for a level playing field?
Several proponents of market integrity concern investors. Investors want securities markets to operate with integrity and they want fair access to those markets. High-frequency trading embraces both. Professor Larry Harris defines "fair markets" as a market where trading rules are uniformly applied and no fraud occurs (Harris). Harris defines "fair access markets" as a market where investors have an equal chance to take advantage of any opportunities that arise. Fairness in floor trading depends on the integrity of the floor trader who handles trades. That is the problem with floor trading; it leaves integrity and decisions up to the human. Floor trading is a "eat-what-you-kill" business, and it simply cannot be trusted anymore. On the other hand, high-frequency trading is strictly regulated by the U.S. Securities Exchange Commission. Watchdogs within the SEC keep high-frequency traders on their toes and this allows good habits to develop among high-frequency traders. The role high-frequency trading has played in the last decade to finally make securities trading a level playing field cannot be over-emphasized.
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DISCLAIMER: Parts of this website are fictional and were created for a class. Please email my instructor with questions: scheney[at]collin[dot]edu.