Peter Nabicht, from the Modern Markets Initiative (MMI), has written a very interesting piece comparing high frequency traders to Uber taxi drivers. While we haven’t had the privilege of using the Uber service yet, friends of ours who have used it always rave about how great the service is. In fact, we have yet to hear a complaint about Uber, which is probably why competitors like Lyft and RideShare are already entering the market. The quick synopsis of the MMI piece is that the competition that Uber has brought to the streets is just like the competition high frequency trading has brought to trading. MMI believes that both have democratized their respective practices and have lowered costs for all while increasing efficiency.
Sounds like a good analogy except for a few differences that MMI forgot to mention:
- Uber drivers have customers. Most high frequency traders are proprietary traders that have no customers.
- Uber drivers have a great deal of transparency (trip times, costs, etc). Most high frequency traders operate in the shadows with little to no transparency. What information do we (or even our regulators) know about HFT traders who trade in microseconds across asset classes?
- The Uber service connects drivers and passengers together – Uber is like a broker. High frequency traders disconnect traditional investors from each other – HFT’s are scalpers.
And there are some similarities that MMI also missed:
- Uber drivers are not regulated by the the likes of the Taxi and Limousine Commission and can keep their fares lower because they don’t have to pay for the extra cost of regulation. Most high frequency traders are also not regulated by stock exchanges since they are proprietary traders and not broker/dealers.
- Uber drivers do not have the same licensing requirements as traditional cab drivers. Most high frequency traders are not brokers and therefore do not need a brokerage license.
While we differ with some of MMI’s points about Uber and HFT, we do agree with this paragraph from their piece:
“Yet no matter how much efficiency Uber brings to the transportation marketplace, there will still be difficulties in getting from point A to point B. Traffic jams, construction, and pot holes all slow down a passenger’s journey. But these disruptions are not the fault of Uber or its drivers. They are separate problems that can be fixed while reaping the benefits of Uber
Similarly, the structure of today’s financial markets is not perfect. Venue fragmentation, internalization, payment for order flow, complex regulation, and skewed incentives can all sour an investor’s experience. But these market structure negatives are not the fault of high frequency trading.”
We’re glad to see that MMI recognizes the faults in our market structure and we agree with them that they were not created by HFT. However, HFT’s have exploited and continue to exploit these faults while some have even tried to set up roadblocks to block any structural reforms to fix these faults.