Vincent Atuncha

vincentatuncha@gmail.com
+254 725 736 466
Kenya

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Instructor
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High Frequency Trading
Introduction
High frequency trading is a broad term that refers to strategies of trading shares using algorithms
that change placement of orders rapidly within short periods of time like several times in a
second. Although it has existed for many years, it came into greater focus 2010, in an event that
has been referred as the flash crash. The Dow Jones Industrial Average stock index experienced
a drop of about 1000 points for several minutes and revived again. The event had never been
observed in the history of stock exchange and attracted a lot of attention and criticism. It
revealed the vulnerability of the market structure and called for immediate explanation of the
event. After several studies on the event, there was consensus that the flash crash had been
caused by an extensive trading protocol commonly known as High-frequency trading.
Since the Flash Crash, HFT has continued to attract attention of the public and private traders
and brought forward several concerns that require quick and satisfactory responses. The failure
to respond to these concerns will negatively impact the stock market since it has been revealed

that most of the domestic securities consist of HFT. There are fears that the inclusion of HFT in
trading directly in the stock market could increase the fragility of the market. The implication of
this allegation is that people can lose their investments sooner that they expected, or that people
are highly likely to lose their investment, hence no need to invest in stocks. HFT is also feared
to heighten systemic risks in the market as well as hurting the quality of the markets. Among
other stakeholders, HFT may be a new form of illegal trading that may take away the value of
shares within a short period of time. There are also concerns that HFT may introduce a two tier
system where a few people benefit from market trends at the expense of other traders. The
government is also tasked to demonstrate whether HFT takes away the opportunities of non-HFT
investors, thus disadvantaging them from getting as much from their shares as possible in a HFT
free market.
The origin of HFT perhaps is in the launch of a computerized system that could give real time
statistics in the market trends in Bloomberg. This was to enable Wall Street firms make
appropriate decisions to suit the market needs. In 1998 the U.S. Securities and Exchange
Commission (SEC) allowed stock exchange electronically. The decision to come up with
legislation to this effect opened the way for present HFT. By the turn of the 21st century, several
firms took advantage of the opportunities of SEC decision to establish different forms of HFT.
At the start of 2000, HFT formed about 10% of equity orders in U.S. This increased to 35% by
2005 and 56% by 2010. The Flash crash in 2010 aroused the public and the private sector on the
likely effects of HFT and the market and since then HFT has remained a major concern among
traders.
Countries like Germany and EU in general, Australia, and Canada have allowed HFT in direct
trading. Germany is in the process of establishing legislation that would demand all HFT firms to

register for licenses to conduct business. In Australia there is an agreement that the current
regulation is not enough for HFT firms and there is a need for them to undergo stress tests. Firms
that flood the stock market with orders at the expense of other trades pay heavy fines in Canada.
The U.S. is struggling to control HFT so that it can benefit all traders. Italy was the first country
to country to come up with legislation to require HFT firms to pay levy to the government at
0.002% on transactions of less than o.5 seconds (Sergey 2014).
Benefit of HFT
Stock trading has been influenced by globalization and has become a global trade. HFT makes it
possible for people to get much money out their shares as it increases the frequency of liquidity.
This aspect is important for individual investors that want their money to give fast returns which
they can reinvest in other products and increases their chances of accumulating wealth. In as
much as it helps only a few people that are smart in a society, there is no reason to condemn it
since everybody has a chance of being smart. Instead of coming up with ways of preventing such
smart people from benefiting, the government should come up with ways of encouraging fair
competition among all traders (Gary and Rena 2014).
The chances that about half of the trades in the US stock market are influenced by HFT are about
50 percent. Although Michael Lewis speaks so much against HFT, traders need to acknowledge
that not even IEX exchange is free from HFT. Responses from market participants indicate that
IEX has about 50 percent HFT. The figures are low from the exchange that continues to deny
such high involvement of HFT. There is no need to demonize HFT when it is here to stay and to
work to profit those that will embrace its advantages and work to eliminate or minimize its
negative effects. The main reason that can explain the much attention to HFT in the recent past

is that it is a technological solution that would continue to exist and change as long as technology
shall exist and develop. No matter how much people and institutions condemn it, it will not go
away. The mysterious thing about HFT is that while some people are busy condemning it, the
system is giving many other people good returns for their investment. Both parties need to unite,
share their concerns and address them together to make HFT serve them instead of threatening
them (Chilton 2014).
There has been so much focus on the negatives of HFT with little attention to its positives. The
public concerns and the New York attorney generals complaint against HFT seem to ignore the
studies that have revealed that the cost of running modern markets is lower than traditional
markets, and the safety of peoples investment has improved greatly in modern markets. The
demonizing references to HFT like toxic and predatory are not warranted at all. Before making
any more negative remarks about HFT, traders and business regulators as well as law enforcers
need to remember that the markets of the country are not broken nor static. The speed with which
technology is moving the market forward should challenge all stakeholders to adjust themselves
appropriately to respond properly to the needs of the market. The work of these stakeholders in
never complete because every day comes up with new opportunities and challenges that needs
their attention. The public and private sector should work together to identify the structures in the
market that require adjustment or improvement to benefit al individual and corporate investors in
an equitable manner without disadvantaging anybody. It is difficult for people to build
opportunities if the ones it is supposed to benefit keep on recognizing as an enemy instead of a
friend.
High frequency traders are an important asset of todays market since they provide a professional
shift in modern capital markets. When it is done only for profit, it is a proper mechanism for

moving supply and demand quickly and efficiently to the benefit of long term investors. The fast
flow of products and services is necessary in the sustainability of modern markets. It reduces
volatility of goods and services and gives good returns for investment. All stock exchanges
including IEX need HFT and banks.
Risks of HFT
HFT has come under increased scrutiny since the publication of Flash Boys by Michael Lewis.
The use of computers that run highly sophisticated programs makes many traders get worried of
the future of their businesses. It is difficult to charge these HFT traders although their activities,
making so much profit through quick sales, are illegal. The difficulty comes in the fact that these
traders use sophisticated computer programs that keeps on changing due to increased advances in
computer technology. The complications of these programs make it difficult for market
regulators to distinguish between manipulation and acceptable marketing strategies. The HFT
traders are experts of ICT or employ experts in ICT that are able to make alteration in computer
programs to achieve desired results. Since the programs changes from one day to another it
becomes almost impossible to victimize such firms for evil doing.
The first case that succeeded in demonstrating manipulation in the use HFT is the one that the
Securities and Exchange Commission announced late October 2014 about Athena Capital
Research, in New York based firm. There was enough technical evidence that the firm
manipulated the trading system using a sophisticated set of commands referred to Gravy to
manipulate the system towards the last two seconds of closing stock business. Gravy was able to
adjust the closing price of stocks in a manner that favored the outcomes of the trades of the firm.
The system was able to generate profits from rapid trading even after the market closed without

holding any shares. In the long run the system was able to eke out some little profit, with little
consideration of other traders, by shifting the stock price higher by some little pennies. Although
the firm had traded the whole day, it accumulated over half of its shares some few seconds
before the stock market closed. About 75 percent of its Nasdaq volume consisted of the shares it
obtained from the few seconds Gravy was able to adjust prices. A report of one day showed that
the company had earned over $5000 profit in one day. In one of the emails SEC used against the
company, one of the managers was excited to an extent of wanting to organize a trip to Vegas to
celebrate the victory of the program.
The success of S.E.C in winning the case against Athena depended on their ability to show that
the firm had an intention of altering prices of stocks artificially in addition to the intent to make
profit illegally. The emails from the firms managers helped to prove the case against the firm. In
the emails the managers had been discussing on designing Gravy with a goal of changing stock
prices. In order to increase evidence against Athena SEC was able to show the manner in which
the firm crossed the line from acceptable business into manipulation. On one day, 10 minutes
before the close of the market at 4pm, the firm gave orders to sale or buy shares, and a few
seconds to the closing line it provided so many orders on its opposite side thus diluting prices of
shares on one side, making a huge gain on the other side. One example from that day was eBay
where Athena gave six orders to purchase shares in less than one second to the close of the
market. With little time remaining to close the market, the price of shares comes so low so as the
companies trading not close the day without sales. In that day alone the price of shares within
those milliseconds went up by over 2 cents.
HFT firms do not stay in the market for a long time before they withdraw. These firms are hardly
interested in the fundamentals that control the businesses of the companies, the owners of the

shares that these firms trade. Allowing these firms into the market endangers other traders that do
not have the ability to compete at such high speeds in the stock exchange market. Many people
are likely to withdraw from the market in case SEC does not come up with stringent measures to
regulate the computer firms.
HFT increases the chances for traders in the stock market to lose the price of their shares, and
most likely discourage people from trading their shares due to low prices. Although SEC is keen
and through the Athena case has restored confidence of traders of its ability to tame these firms,
the rate at which these firms are entering the market may overwhelm the efforts of the regulator
to notice them. It has taken SEC so many years to be able to prosecute one firm of manipulation
in the stock market. The violation for which SEC accused Athena took place between April to
December 2009, and was prosecuted in 2014. The time it can take to gather enough evidence to
prosecute HFT charges might be longer than it took the Athena case. There are high chances that
many other firms continue to carry their businesses unnoticed, at the expense of other traders
during the long duration of preparing charges.
The long duration of investigation and prosecution is as a result of the use of sophisticated
computer programs. SEC may not always have the capacity to obtain the details of the programs
and the events they carried out at certain times due to the high speed in which they operate. The
effects of these programs are huge since the discovery can take several months to years(Henning
2014).
HFT crimes attract a penalty of a maximum of $750,000. Sometimes, the fine might be higher
than this if SEC is able to prove that the losses associated with crime are much more the
maximum penalty. Like in the case of Athena, the fine was $1 million. Due to unpredictable

financial times, a company may lose much of its investment through settlement of such fines.
The case is a warning against HFT dealers to be careful in the design of their programs lest it
appear that they want to rob people of their gains at any cost without adhering to the laws of
competition. Communication among the people involved should not be so sophisticated or as a
result of one days excitement to an extent it becomes enough evidence to victimize a company
against manipulation claims.
Conclusion
So long as the HFT firms can remain transparent on the events taking place at the background of
their computers, there will be no need for alarm among traders. HFT should aim at getting profits
in their own way without artificially adjusting prices of stock to favor their trades. It would be
advisable for them to become permanent in the market so as to share the financial gain and losses
equally with other traders. There is much that can be done to make HFT give appropriate results
for the benefit of all traders. The first step is to ensure that the design of software meets the
standards of the market. In case the standards are missing, the stakeholders need to agree on the
basic things that must be incorporated in any system and let different firms develop their own
system. The deployment of safe programs will make HFT safe and its conduct responsible.
In the current situation where most of the HFT firms do no need to register with the Commodity
Futures Trading Commission or the S.E.C, there are so many loopholes for misusing HFT to hurt
the economy of several traders as well as the country. The lack of registration or laws that
demand all firms to subscribe with the commissions make it difficult for the commission to
obtain materials like records and books that can help in establishing charges or any claims
against or for the firms. People cannot even release information that may help in investigations

since they would not be assured that the evidence will find light of day due to unlikeliness in
securing cooperation of firms to justify evidence against them by providing details of their
operations. In addition to the lack of registration laws for most firms, there are also minimum
requirements for testing of trading programs or incorporation of kill nonresponsive programs.
Such control measures ensure that all trading companies that prefer HFT strategies go through a
vetting process that would test their technologies against minimum requirements, and thus
safeguard countrys trade from human designs to harm the economy.
Although most critics have argued that allowing HFT in the market poses many difficulties in
setting the minimum standards for vetting. It is possible that such people speak from ignorance
and a lot needs to be done to give them proper information on the mechanism behind which the
program works. A company that trades directly in the capital markets using an automated system
is easy to pull in a regulatory order compared to manual operations. Several firms that trade in
high frequency are wiling for regulation. There are some that are under regulation already and
are comfortable for further or advanced regulation. These firms recognize that confidence of
investors depends on the ability to predict the future of their investment. Increase in regulation is
one of the assured strategies of increasing investor confidence in HFT, just like the other forms
of trading are under strict regulations.
Works Cited
Peter, Henning. Why High Frequency Trading is so hard to Regulate. October 20 2014.
http://dealbook.nytimes.com/2014/10/20/why-high-frequency-trading-is-so-hard-to-regulate/
Bart, Chilton. No need to Demonize High Frequency Trading. July 7 2014.
http://dealbook.nytimes.com/2014/07/07/no-need-to-demonize-high-frequency-trading/?_r=0

Gary, Shorter, and Rena Miller. High-Frequency Trading: Background, Concerns, and
Regulatory Developments. Congressional Research Service. June 19, 2014.
http://fas.org/sgp/crs/misc/R43608.pdf
Sergey, Golubev. July 22 2014. HFT. http://www.mql5.com/en/blogs/post/862
Instructions

Type of service:
Writing from scratch
Work type:
Argumentative essays
Deadline:
20hrs
Academic level:
College (1-2 years: Freshmen, Sophomore)
Subject or Discipline:
Finance
Title:
High Frequency Trading
Number of sources:
2
Provide digital sources used:
No
Paper format:
MLA
# of pages:
10
Spacing:
Double spaced
# of words:
2750
# of slides:
ppt icon 0
I need a article including about three points for support High Frequency Trading, and there are 2
sources for support each points at lease. This article is a reporting paper for speech and
presentation. This article will be able to including some questions as follow:
1: describe the history about HFT and explain HFT.
2: how is going on in the HFT
3: the benefit and the risk about the HFT
Paper 4: which country have the HFT and introduce their trading. besides, some country they do not
details: allowed the HFT and why
in whole article, we are support and agree with HFT as proposition in the argumentative.
In addition, you can add more questions as above to answer in order to support this subject.
I don't care about the format or citation style in this article.