Should funds be worried about high frequency traders?

Should funds be worried about high frequency traders? (Tax Credits on flickr)

Pension funds, mutual funds and hedge fund managers are concerned about high-frequency traders (HFTs) and seem to have had good reason to be. But how many HFTs are there actually out there, laying in wait, threatening those funds?

Participation, unknown identities and their future intent are high on the list of concern, however, it seems funds shouldn’t be worrying so much. The Australian Securities and Investments Commission (Asic) are amongst those playing down HFTs saying concerns are overstated. HFTs have been found to account for as little as 25% of all market activity as opposed to what some claim as 60-70%. In the very liquid S&P 500 ETF, HFTs account for 20% of daily trades. Irene Aldridge also found that HFT activity reaches peaks specifically on the first day of the last month of every year.

So why do we see spikes in HFT participation? Said all funds… Managers try to liquidate their portfolio at the ends of each year, often done every month or the first or last day of the trading month. Managers execution brokers then deploy HFT strategies to disperse the block trades in the daily market stream. So fund managers give those permission and therefore appear to bear the responsibility of the HFT activity in question.

The case emerging that investment managers are also the largest HFTs. Hmmm…. What do you think? Let us know.

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