The good, the bad and the ugly of HFT

eastwood-good-bad-ugly1-288x220.jpgIt’s a murky business, dark pools and high frequency trading. But all not all HFT is bad news, says one of the practices fiercest and most vocal critics.

Brad Katsuyama, chief executive officer of IEX Group Inc and all-round anti-HFT campaigner, appears to be softening a little. During a presentation in Florida this week, he once again set out how IEX creates a more level playing field for investors and stressed that HFT is not good for the market.

But he distanced himself from some of the more combative language he used last year when Michael Lewis’s Flash Boys hit the shops.

Back then during a fiery CNBC debate, Katsuyama levelled a stark accusation at the feet of the then BATS Global Markets Exchange president William O’Brien. “I believe that the markets are rigged and I think you are part of the rigging,” he said.

Now, CNBC reports from's InsideETFs conference, Katsuyama is keen to stress the difference between good and bad (and no doubt ugly) HFT.

Starting IEX "was about trying to understand the advantage that certain people have in the markets and trying to take that advantage away", Katsuyama was reported as saying. For him it’s less about being overtly anti-HFT and more about being in favour of fairness.

So what’s the difference in the eyes of the IEX boss? Using arbitrage to benefit from price inefficiencies is basically practising ‘good’ HFT. If you’re getting faster access to economic data or your trading infrastructure is physically closer to the likes of the NYSE, it’s ‘bad’ HFT.

Katsuyama is part of a 17-member Securities and Exchange Commission panel investigating high speed traders and dark pools.

While the SEC’s chair, Mary Jo White, does not think the markets are “rigged”, the panel will dial down on the impact of the SEC's Regulation National Market System, or Reg NMS, which many believe led to HFT by requiring investors to get the best price.

"Additional expertise from a diversity of backgrounds and viewpoints will be invaluable to us in ensuring that our markets continue to operate openly, fairly and efficiently to benefit investors and promote capital formation,” said Ms White in a statement.