Barrons’ Abelson chimes in on HFT

We have recently pointed out that many more voices have been weighing in on our fragmented equity market structure.  Firms like Southeastern, Invesco, Principal, Iridian and Baron Asset are all well respected, established institutional players that have joined the chorus of voices and are starting to demand action from our regulators.  The chorus got even louder this weekend as Alan Abelson form Barrons weighed in.  He quotes from a newsletter for individual investors called Crosscurrents: “The public has gotten the shaft from Wall Street, from the SEC, from short-oriented hedge funds and now from high-frequency trading.”  Ouch, that one stings. 

 But Abelson goes on to highlight another paper titled “The Marginalizing of the Individual Investor”.  The piece was written by some folks associated with a firm called Bluemont Capital.  We don’t know these guys or their firm but we do know that they just wrote an excellent piece: .  In the paper, the authors question if HFT has distorted true market valuations.  Here are a few quotes:

 “Unfortunately, high-frequency trader interaction with computerized algorithms of large-cap financial institutions is providing opportunities for high-speed, virtually undetectable market manipulation.”

  “At a minimum, computerized high-frequency and algorithmic trading are undermining traditional value investing strategies. Short-term liquidity and data movements are distorting information on real business performance.” 

 “Essentially, high-frequency trading platforms function as positive feedback loops. Engineers treat positive feedback loops as inherently unstable, as each positive response generates stepped-up repetition of the same actions. Positive feedback loops result in an ever- expanding balloon, but like all balloons, the risk of bursting increases with the balloon’s size. “

 The chorus is singing and they are sounding better every day.