Two supercomputers crunched the data and concluded high frequency trading has “little impact on our lives”

January 11, 2013
January 11, 2013

Scientists used two of the world’s largest supercomputers in a study that has determined the impact of high-frequency trading on US stock markets is virtually nothing.

In fact, the research suggests that the bulk of high-frequency trading transactions are cancellations–32:1 when trading occurs in nanoseconds–which do nothing to increase liquidity in the market and have no impact on trading volume and price efficiency. Quartz has previously written that high-frequency trading can actually be good for long-term investors by enhancing liquidity and narrowing spreads.

The only advantage of high-frequency trading, says Mao Ye, professor of finance at the University of Illinois and head author of the study, lies in the fact that the speeds at which these transactions take place allow high-frequency traders to play more complex trading games, such as quote stuffing–a practice where traders try to slow down the market by putting in a colossal amount of orders only to cancel them immediately.

But these games have little impact on those with regular old Macs and PCs, average Janes and Joes of trading. “If you increase the speed from microseconds to nanoseconds, that will only benefit the fastest guy,” Ye says. “It has little impact on our lives.”

Not everyone agrees with this assessment. James Angel, finance professor at Georgetown University, says that although there are times when market cancellations explode, the 32:1 ratio is not a constant. “People are using fast computers to do things that traders have always done in the market, sometimes good and sometimes bad,” he says. “So it does have an impact. And the fact that they use fast computers, well, good for them.”

But Ye thinks that his study highlights the fact that improving trading speeds doesn’t affect the average investor. The study, Ye says, is the largest academic finance computing effort to date. It was backed by the National Science Foundation’s Extreme Science and Engineering Discovery Environment program.

High-frequency traders will eventually hit a speed wall, Ye says. When that happens, it will become apparent that there is little value to the practice, even for those who currently swear by it.

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