Economicate - The Economics Forum

A huge topic in Finance at the moment is that of High Frequency Traders (HFTs) - a form of algorithmic ('algo'), computer-driven trading.

One major issue is 'flash-trading', one use of HFTs, which may well soon be banned.

High-frequency trading (http://vimeo.com/6056298)
Here's a video that explains what HFTs are, and amongst other things their use in flash "trading".

Basically, massive financial firms have massively powerful computers and extremely good people working on them. These computers can act almost instantaneously, in some cases literally staying a step ahead of human traders, "front-running" them by using "flash orders". Practices like these put the average retail or institutional investor at a disadvantage; they lack the capability to invest in such technology themselves.

Front running
Front-running in general has always existed. It is the illegal practice of stockbrokers taking advantage of their position to make money off clients' orders, in the process raising their clients' costs. For example, if I tell my broker to buy 1000 units of stock XYZ, the broker could secretly go and by some XYZ of his own first, and then put perform my buy order.
The broker has ridden the price rise resulting from my purchase, making him a profit, ceteris paribus.
The broker's initial purchase also pushed up the price for me, so it has reduced my profit too.

Flash orders
Flash orders, however, have only become a talking point in the past few months. This is essentially the use of these super-fast computers to front run, on exchanges which (for a fee) will allow these computer traders to get view new orders fractions of a second before the rest of the market. Performed on a massive scale, this raises costs for market participants without these incredible facilities.


My question is whether or not you agree with this ban. Do you agree that flash trading is an 'unfair' advantage? Even if it is, does unfairness justify it being outlawed? Has this ban prevented a natural progression of financial markets, and is this ban simply a counter-productive defence of an antiquated system? Or does this ban act in our long-term interest after all?