17 SEPTEMBER 2019, LONDON

High-Speed Trading Isn't Just Faster, It's Also Fairer

There's always a charged reaction when any market policy discussion reflects on the pace of change taking place in our financial markets. But this is not a debate that should be conducted based on perceptions or emotions running high. Instead, it is a debate that should be based upon facts and conducted with an examination of data. There is no doubt today's financial marketplace has changed. Scrums of floor traders are a thing of the past. Open outcry pits have emptied out and largely fallen silent, their ranks having dwindled to just a handful. In its place now stands a fully transformed market. Professional traders using electronic trading platforms and low latency trading technology have modernized and democratized the markets, delivering greater competition and efficiency for the investor. So, yes, financial markets have evolved into a faster and fairer marketplace than the slower, less efficient manual market of the past. How do we know this? The empirical evidence tells us so. Studies examining market data demonstrate the investments in technology made by market participants have led to a more efficient marketplace. Critics of technological advancements in the market do not ground their arguments in data. Instead they base their appeals on opinion, seeking to generate animosity and skepticism towards high frequency technology, automation and electronic platforms. Yet, these are advancements in the market that, were they achieved in any other industry, would be welcomed and promoted. To stand in the way of technological advances is to stand in the way of efficient markets and fair prices. Removing technological advancements from the markets would hamper market stability and cost investors money. Automation technology allows companies to improve efficiency and scale, driving down their costs and thus driving down the costs of their product for the customer. For example, when automobiles first came to market, they were in short supply and only available to the wealthy customers who could afford to pay a high premium. Then, the Ford Motor Company pioneered the use of automation technology on their production line and this innovation brought about lower prices, making cars more affordable and available, simultaneously contributing to the overall economy and a higher quality of life. Ford's assembly line was only the beginning. Over the last 100 years, we have witnessed a dynamic level of technological innovation, along with increased competition. With each new advancement the consumer has been the main beneficiary, paying less for increased quality. The principles of technology and innovation improving quality and costs are not unique. Industry after industry has used technological advances to improve all aspects of their businesses. The financial markets are no different. We have advanced past the days of crowded trading pits and ticker machines towards a new, modern market using electronic platforms and advanced computer technology. As a result, information that was once monopolized by just a few has now been liberated. More participants have more access to the market than ever before, and the increased competition has lowered costs and improved market prices. Technological advancements are helping all market participants, most notably the average investor. When the markets relied on slower, manual transactions, investors had no choice but to pay more money to trade at worse prices. As the technology used in the markets evolved, professional trading firms invested in high frequency trading and automation, prices have fallen for investors. The result is a more liquid market with better prices and lower trading costs than any previous market era. Casting technologically advanced markets and professional traders as somehow dangerous, as critics have done, is contradicted by the available evidence we have demonstrating that both contribute to a better market. The fact that some market participants trade faster than others is often presented as evidence our markets are unfair. History teaches us that some market participants, driven by different market pressures and incentives, have always been faster than others. Professional traders, however, do not compete against the average investor. Rather, professional traders compete with each other to the benefit of the investor. The healthy competition between these professional trading firms drives inefficiencies out of today's markets, which translates into fairer prices and cheaper trading costs for the average investor. Professional traders are, ultimately, service providers in the market. Like service providers in any other industry, the customer (in this case, the investor) demands that they be fast, efficient and constantly engaged in their business. In that sense, the use of high frequency trading systems to continuously provide fair and accurate prices to investors is driven by the market efficiency demands of the average investor. Critics of high-frequency technology should realize they are approaching the whole debate about speed in markets from a misinformed point of view. In a well-functioning marketplace, speed is a valuable tool, not a weapon About Author: Peter Nabicht is Senior Advisor to the Modern Markets Initiative, an advocacy organization of professional trading firms using high frequency trading technology. Mr. Nabicht is a former executive vice president and Chief Technology Officer at Allston Trading in Chicago. Learn more about the Modern Markets Initiative at ModernMarketsInitiative.org or on Twitter@ModernMarkets www.ascert.com