In case you missed it Sunday night, a reasonably well-done intro to High Frequency Trading (or HFT):
And here’s more web-only video on HFT – this clip being of the COO of the New York Stock Exchange. If you play the video backwards you can hear him admit a huge conflict of interest:
Another web-extra from Sen. Ted Kaufman of Delaware on how high frequency trading grew:
And here is the principal of a high frequency trading firm attempting to demonstrate, ah-hem, how HFT actually benefits small investors. With a straight face. Thank you, Botox!
I think Steve Kroft nailed the relevant takeaway for individual investors in the intro to the first clip above:
“[These computers] are operating on highly secretive instructions programmed into them by math wizards who may or many not know anything about the values of the companies that are traded.”
1 – If you can objectively identify the best of those companies with the widest discrepancies between share price and intrinsic value – whether or not HFT is involved – you will do well as an investor.
2 – Speed is not a durable competitive advantage. Thus, High Frequency Trading firms have no moat. And unless the machines become clairvoyant, there would seem to be a cap on the efficiencies in this business.
Because new competitors and increased public pressure will likely make the economics of running an HFT firm poor, I suspect this problem will ultimately fix itself. And then, 3.4 nanoseconds later, the S.E.C. will announce a preliminary investigation into it.