Ultimately, we seriously doubt HFTs will go away. Using an information edge, legitimate or otherwise, has been a successful strategy since the days Jesse Livermore was taking advantage of stock “bucket-shops” to make millions in the 1920’s. So is there anything that traders should do about HFTs and the potential risks they create? We would suggest that there are a two things that can be done.
First, if you feel passionately for or against HFTs and their practices, call your legislators and make sure they know. We will stay out of the politics of this issue for the most part except to say that informed involvement by the public is an essential part of Our Republic. The other thing investors consider is how they are exposed to firms that may be exposed to losses (or gains) if the rules around HFT change.
For example, since the media frenzy around Flash Boys started, the big exchanges that facilitate HFT trading are off significantly. Over the last month the Nasdaq (NDAQ) dropped -11.52%, the CME (CME) is down -8.4% and the Intercontinental Exchange (ICE) and Chicago Board Options Exchange (CBOE) are both down around -7%. Clearly, this is a bad time to be an exchange (or an investor in these stocks). HFT volume is a source of profits for these firms and those profits may be at risk.
The bottom line is to make sure that you understand the basics of what HFTs are doing and that they aren’t all the same. Some really are bad guys but others wear white hats and provide benefits to the market. It’s what makes this problem so intractable.
In either case, whether HFT is bad or not may be a moot point since they aren’t likely to go away. Like the hydra, changing one set of rules won’t prevent another crisis. If this were an easy problem to fix, why are we still dealing with it 27 years after the “Flash Crash” of 1987?
InvestorPlace advisors and preeminent options coaches John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.