WASHINGTON Dec 4 High-speed traders make money
off the back of small investors without taking much risk
themselves, a top U.S. government researcher found, potentially
posing a setback for the sector as regulators consider tighter
High-frequency trading firms (HFTs) earn large and
persistent profits, according to a study by the chief economist
at the Commodity Futures Trading Commission (CFTC), the powerful
U.S. derivatives regulator.
"HFTs derive their profits from fundamental and small
investors," Andrei Kirilenko said in slides he first presented
at a conference on Friday. "HFT profits increase in
The study, which Kirilenko had written together with two
academics outside the CFTC, presented the views of the trio of
authors and not necessarily those of the CFTC, its
commissioners, or its staff.
The CFTC said the study is still under peer review, a common
process for academic papers in which other researchers critique
a publication before it goes to print.
Critics of high-speed trading say it can exacerbate market
crashes because traders need to turn over large volumes to make
enough money from the tiny price differences they seek out,
reaping a small margin on each trade.
Europe is discussing tighter rules, such as forcing the
traders to post orders for at least half a second, far longer
than the fractions of a second they currently stay in the
market, in which each micro-second counts.
In the United States, the issue is on the radar of the
over-arching Financial Stability Oversight Council (FSOC), which
called for "policy responses when appropriate" from the CFTC and
the Securities Exchange Commission in its 2012 annual report.
The body has also said that monitoring the sector in
real-time is hard because it is opaque.
The sector, which accounts for about half of all stock
exchange trading, has been blamed for playing a role in the May
2010 "flash crash," when the U.S. stock market plummeted nearly
10 percent in a matter of minutes.
A panel of outside experts in 2011 recommended that the SEC
and CFTC rein in computerized trading and suggested charging
HFTs for their disproportionately high buy and sell orders.
The SEC and CFTC have not yet issued their own framework of
potential reforms for the industry.
CFTC Commissioner Bart Chilton, a Democrat who has long been
critical of the high-speed trading sector, welcomed the study
from Kirilenko and others.
"What this paper shows is that this type of speed trading
can often be parasitical and have far less value to markets and
price discovery than many contend," he said.
Britain is more attuned to the industry. In a
government-sponsored paper released in October, it rejected most
of the recent plans hatched by Brussels.
Out of nine proposals, the paper found two were effective,
while seven were problematic, including a plan to force HFTs to
post prices to buy and sell at all times, to stop them from
pulling out when markets get choppy.