Sweta Killa: High frequency trading (HFT), though common in the U.S. over the past several years, has become more prevalent in recent months.
Worries over high frequency trading surged after the famous author Michael Lewis published “Flash Boys: A Wall Street Revolt” last week. The book criticizes the practice of HFT citing that super-fast computers, high-speed data networks and complex algorithms have resulted in profits of millions of dollars for the financial brokers and trading firms.
This is because traders take the benefit of fast-moving market information unavailable to other investors through advanced technology, and trade securities accordingly in blocks within a fraction of a second. This ends up in financial stock market manipulation and instability in the short-term price. Not only does this erode public confidence, it also affects professional traders and sophisticated market participants.
The book raised additional scrutiny on this type of trading by the Federal Bureau of Investigation. The agency is looking for the possible violation of insider trading law or any other law through high frequency trades, and joined with Securities and Exchange Commission and the Department of Justice for further investigation.
The increased scrutiny concern has led to the slump in the investment brokerage world with most of the stocks seeing terrible trading over the past week. E*TRADE Financial (ETFC) has seen the biggest drop of about 16% so far this month. This is followed by 10.7% loss for TD Ameritrade (AMTD) and 6.5% for Schwab Charles (SCHW).
The downslide was prompted by market speculation of a ban on the payment for order-flow deals by regulators. Trading and brokerage firms generate a big chunk of their revenues from lightning-fast trade and prohibition of order-flow deals would have a huge impact on their revenue streams.
The ETF world has also seen rough trading with iShares US Broker-Dealers ETF (NYSEARCA:IAI) down over 6% this month. This dip could be considered a buying opportunity for investors seeking to take advantage of this situation as HFT will stay alive and the ban on payment-for-order-flow is pretty unlikely.