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FX HIGH-FREQUENCY TRADING


Myth No. 1: High- frequency


trading (HFT)


firms make everything more expensive for everyone


Many people, both within the financial service industry and outside it, have a perception that HFT firms are predatory; they make all the money while individual investors lose – a zero-sum game.


But that’s actually not true. For markets to work properly, you need lots of people participating and lots of money moving in and out from various sectors – i.e., lots of liquidity.


and shares went down to a penny because no one wanted to buy.


In fact, HFT firms can help prevent exactly these kinds of issues by providing the liquidity that acts as a shock absorber for the


That’s not quite true. These exchanges are


heavily regulated


by the Securities and Exchange Commission (SEC) and the U.S. Commodities Futures Trading Commission (CFTC),


of the regulations is a mandate granting


equal access.


Many people have a perception that HFT firms are predatory; they make all the money while individual investors lose – a zero-sum game


HFT firms provide the liquidity needed to fuel the market, which actually makes it easier for individual investors to buy and sell: Without a certain amount of liquidity in a particular market or commodity, they become more expensive.


Some allege HFT firms were responsible for the 2010 Flash Crash, but the crash actually proves


these points; 18 FX TRADER MAGAZINE April - June 2019


natural ebb and flow of individual investors’ trades.


Myth No. 2: HFT firms have data


special access liquidity evaporated, everyone pulled out,


There’s a perception that HFT firms can gain information about the exchanges, including price, through certain backchannels that regular investors don’t have access to.


to


There is a caveat to this one, however. The exchanges have different levels of service in terms of the market data they provide; the more someone is willing to pay, the faster they get information. This means it’s possible, in theory and practice, for HFT firms to get better information faster, but the fact remains that it’s available to everyone – even though not


everyone wants to pay for it.


There have been outcries in the past against HF traders who received information about


the


results of their own trades before the market does, with some saying this grants an unfair advantage. Yet HFT firms only get this information as it pertains to their own trade activity; they effectively pay for the right to get data faster in exchange for taking on risk.


and one everyone


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