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 HFT is a practice carried out by many hedge funds, banks and
proprietary firms using sophisticated computer programs to send high
volumes of orders at near light speed, executing short-term trades
to make markets or capitalize on price imbalances. HFT makes up more
than half of all U.S. trading volume.
Last week, New York state's Attorney General Eric Schneiderman said
in a speech that U.S. stock exchanges and alternative trading
platforms provide HFT firms with unfair technological advantages
that give them early access to key data.
Shares of Nasdaq, the third-largest U.S. stock exchange operator by
volume, fell as much as 4 percent during on the day of
Schneiderman's speech, its biggest single-day drop since April 2013.
HFT firms pay to locate their computer servers within the data
centers of exchanges, and for extra network bandwidth and high-speed
switches that give them pricing, volume and order information ahead
of others as they race to take the other side of profitable trades,
which they then quickly trade out of.
Proponents of HFT argue that the practice has led to a more
efficient market and ultimately, a reduction in bid-ask spreads,
benefiting all investors.
A ban on HFT would be unlikely, as that would make it harder for
investors to get their trades filled, and it would lead to wider
bid-ask spreads, Greifeld told analysts and investors during a
presentation in New York on Thursday.
"People are going to be very hesitant to put in policies that remove
liquidity from the market. You could argue whether the liquidity is
always there when you want it, but there is still liquidity in the
marketplace," he said.
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HFT critics say the liquidity provided by these firms is fleeting
and that in times of stress, when the liquidity is needed most, many
HFT firms pull back from the market.
In May 2010, the market plunged nearly 700 points in a matter of
minutes before sharply rebounding, shaking the confidence of
investors in the soundness of the market. A regulatory report found
that HFT was not responsible for causing the so-called flash-crash,
but that the problem was exasperated as HFT firms quickly exited the
market.
If curbs were placed on HFT, the wider spreads would present other
opportunities that would be "fundamentally advantageous" for Nasdaq,
Greifeld said, in response to one of three questions from analysts
on the possible impacts of any new HFT legislation.
"The point is, I don't see anything happening in the near term and I
think when the regulators and the people who know the markets and
have the economic data in front of them, they are going to be loath
to take liquidity away from the market. I have yet to see that
happen in any regulatory structure around the planet," Greifeld
said.
(Reporting by John McCrank; editing by Lisa Shumaker)
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