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HFT Questioning and the “Adding Liquidity” Argument.

14

August, 2009

I believe that it is extremely wise and helpful for all investors to ask questions about a very murky and little-understood style of trading, lately labeled HFT. Dark pools? Predatory? How so? Who plays? What’s the angle? We make no value judgement in general on investing styles, but we do ask questions when one group is catered to at the expense of other groups. We have heard our motives questioned more than we’d like to have, and questioned in personal attack-style language  from  slick ex-lawyer types. We won’t play that game. We have been taught that when you wrestle with pigs, the pigs like it and you get dirty. No thank you. We don’t have all the answers (it is hard to without access to the plethora of internal data collected and sifted though by the involved players), but we do know the questions, and we make no apology for asking them.

I have heard one defense of HFT made repeatedly over the past few weeks, over and over again, by HFT players. HFT adds liquidity. When a retail investor can buy 1000 shares of Citigroup (C) at will, with a penny spread, their long term investing styles are helped and not hindered. OK.  I understand the obvious. However, I would like to see HFT justify their “liquidity” in a stock like AEPI.  When, on behalf of a client, I place an order in a thin security, displaying a piece of my order, and instantly my bid triggers 5 different players each commencing to bid above me, and take the stock up 30 cents on 1,200 shares, this HFT activity is predatory, and I do not feel blessed by their “liquidity”. An overwhelmingly massive majority of institutional traders echo this sentiment. HFT does not add liquidity here; it adds volatility.

I am open minded. I will listen to why it should be acceptable that whenever I place my bid, 5 players bid above me in layers, and when I cancel, so do they.

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