High-frequency Trading — Do regular investors stand a chance?

I. INTRODUCTION

Distance ÷ time = Speed

Speed = $

Similar to The Flash, the fastest superhero in the world, high-frequency traders leverage speed to win. High-frequency trading (“HFT”) is an algorithmic trading strategy using computer programs to transact thousands of orders in fractions of a second. Millions of tiny transactions based on human-created complex algorithms instantaneously obtain and react to market information. “In addition to the high speed of orders, high-frequency trading is also characterized by high turnover rates and order-to-trade ratios.”[1] Although this seems novel, the U.S. Securities and Exchange Commission (“SEC”) recognized — over a decade ago — that HFT was the most significant market structure developments in recent years,[2] accounting for over 50 percent of trading volume in the US equity markets.[3] Today, algorithmic trading accounts for 50–70% of all equity trading by volume in the United States equities markets,[4] increasing from 10% in the early 2000s.[5]

As with all innovations, HFT creates opportunities for exploitation by nefarious actors. Many believe HFT has resulted in a “rigged” system that jeopardizes our markets. Indeed, if retail investors lose faith, the system will collapse — and so will our economy…