The May 6 flash crash has put high frequency
traders under a harsh spotlight. Many investors contend that
these traders, who use high-tech tools to buy and sell stocks
in microseconds, put long-term investors at a disadvantage by
front-running their orders and fueling market volatility.
Such activity merely increases the effective cost of trading
for pension funds and other institutional investors, critics
At a time when investors are struggling to eke out any
returns they can get, costs are as important as ever.
Fortunately, despite all the controversy about high frequency
trading, the evidence suggests that these high-speed,
high-volume players continue to put downward pressure on
equity transaction costs, not raise them, according to our 14th
annual survey of trading costs, conducted for Institutional
Investor by New Yorkbased Elkins/McSherry, a subsidiary
of Bostons State Street Corp.
[Click here to access the tables indicating Global
Execution Time and Market Impact
The average overall cost of equity trading in the U.S. edged
up during the 12 months ended June 30, but that increase
largely reflected lower trading volumes and higher volatility,
says James Bryson, president of Elkins/McSherry. The underlying
trend in costs is still headed lower, he adds. And costs fell
significantly in most international markets.
The concerns about high frequency trading are not
justified, because we have seen trading costs falling pretty
consistently, says Jamie Ritchie, director of capital
markets trading at Brockhouse & Cooper, a
Montreal-based global agency execution brokerage operating
in 39 countries, including the U.S. Some of that has to
do with the high frequency traders.
Average transaction costs for New York Stock
Exchangelisted stocks rose 10 percent in the latest
period, while costs on the Nasdaq Stock Market were up 16
percent, according to the survey. The U.S., with an overall
average cost of equity trading of 19.63 basis points in the
period, is no longer the worlds low-cost trading venue.
Japan and Sweden share that crown, with an average cost of
18.34 basis points in the period, followed closely by France,
at 18.49 basis points. Average transaction costs globally
declined 8.1 percent over the past year, to 38.02 basis
Concern about high frequency trading soared after May 6,
when the Dow Jones industrial average plunged nearly 600 points
in a matter of minutes and temporarily erased $862 billion in
equity value. A report on the incident by the Securities and
Exchange Commission and the Commodity Futures Trading
Commission attributed the collapse to a large automated sell
order placed by a mutual fund manager, but it added that
temporary withdrawals from the market by some high frequency
trading firms may have exacerbated the decline. Regulators are
weighing whether to impose some curbs on high frequency
trading, but with such activity accounting for as much as 70
percent of stock trading volume in the U.S., the prospects of a
crackdown appear remote.
Investors appreciate the liquidity that high frequency
traders bring to the market, but they worry about potentially
abusive practices such as pinging stocks, whereby traders
rapidly send and cancel successive orders to uncover valuable
information about an institutional investors position in
a bid to gain a trading edge. If you put in an order and
withdraw it immediately, and you have no intention of trading,
that is something that needs to be looked at, Ari
Burstein, senior counsel at the Investment Company Institute,
told a conference on market quality at New Yorks Baruch
College last month.
I think everyone cares about speed, says Phillip
Mackintosh, who heads Credit Suisses global
portfolio strategy team. What we dont want is
to put an order into a machine and then find out that the offer
you were going to hit is gone.
High frequency trading is less pervasive in Europe, but
industry executives expect volume there to continue to grow.
Such trading is likely to account for 45 percent of European
equity volume in 2012, up from 25 percent currently, according
to Aite Group, a financial services consulting firm.
The case against HFT is generally overstated, Reto
Francioni, CEO of Frankfurt-based Deutsche
Börse, told the Baruch College conference.
For brokers the key to interacting with high frequency
players is to take advantage of the liquidity that they provide
without revealing clients positions or trading
intentions, executives say.