The Law and Ethics of High-Frequency Trading

Michael Lewiss recent book Flash Boys has resurrected the controversy concerning high-frequency trading (HFT) in the stock markets.While HFT has been important in the stock markets for about a decade, and may have already peaked in terms of its economic significance, it touched a nerve with a public suspicious of financial institutions in the wake of the financial crisis of 2008-2009.In reality, HFT is not one thing, but a wide array of practices conducted by technologically adept electronic traders.Some of these practices are benign, and some even bring benefits such as liquidity and improved price discovery to financial markets.On the other hand, there are legitimate grounds for the commonly heard complaint that HFT is not fair.Certain HFT practices such as co-location, flash orders, and enriched data feeds create a two-tiered financial marketplace, while other practices such as momentum ignition, spoofing, and layering are merely high-tech versions of traditional market manipulation.Finally, the creation of special order types such as Hide Not Slide shows the exchanges allowing their HFT clients to jump the queue of pricetime priority embedded in Regulation NMS and stock market practice.