Exchanges Still Using The Same Old Tired HFT Defense
You are probably used to our highlighting the conflicted interests of the stock exchanges when it comes to high frequency trading. But the stock exchanges are not the only exchanges that benefit from the volume that HFT provides. Their derivative cousins like the CME Group also reap the benefits of HFT. As we all know, HFT is not an equity-only phenomenon and its tentacles reach across other asset classes like futures and options.
So, it was no surprise that we found a blog post written by the chief operating officer of the CME titled Understanding The Impact of High Frequency Trading . You may recall from our Phantom Index White Paper that the CME Group is now the proud owner of the Dow Jones Indexes. These are the very same indexes that calculate with “primary” exchange trades only (which only represent about 25% of all trades). When we first saw the title of the CME blog post, we were hoping that the post may actually shed some new information on HFT. But then this line immediately appears in the post:
“In particular, we have long believed that high-frequency traders serve as important providers of liquidity and efficiency to markets.”
Ok, we see where this is going already. Then the post goes on to quote from the UK Foresight study and only cherry picks the “no evidence high frequency computer based trading has increased volatility” line. We think the CME Group should go back to the UK Foresight report and this time read some of the other supporting evidence that the headlines don’t cover. They could start by reading a few of our posts on two of these papers: Some Secrets of HFT Revealed and Attention Human Trader; You Are No
Longer Needed. Guys, pay particular attention to the feedback loop section.
The CME blog post closes with:
“CME Group knows that high frequency traders are critical liquidity providers who help to narrow bid/ask spreads and increase market depth. And we know, too, that liquidity is the best defense against disruptive markets. We should be looking to promote it, not impede it.”
Really…years into this debate and all you can come up with is the shrink spreads and adds liquidity argument. Maybe it’s time for the biggest exchanges to start providing some new reasons why HFT is good. The public does not seem to be buying the old ones.