U.S. high-frequency trading ban unlikely: Nasdaq

NEW YORK (Reuters) - U.S. regulators are unlikely to put rules in place that would harm high-frequency trading (HFT) as doing so would make trading more difficult and expensive for all investors, Robert Greifeld, chief executive officer of Nasdaq OMX Group said on Thursday.

Robert Greifeld,Chief Executive Officer of NASDAQ OMX, speaks during the Investment Company Institute's (ICI) Capital Markets Conference in New York, October 10, 2013. REUTERS/Carlo Allegri

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.

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 exacerbated 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.

This story has been refiled to correct typo in 10th paragraph