The difference a half second makes
CHICAGO - OCTOBER 29: Traders signal offers in the S&P 500 stock index futures pit
A new paper from the Federal Reserve Bank of Chicago calls for change in the world of high-frequency trading, where firms use superfast computers and connections to buy and sell. Fed senior policy adviser John McPartland is only the latest to weigh in on a debate about the pros and cons of high-frequency trading that has drawn in Wall Street, Congress, and regulators. The fight got the attention of a wider audience after the publication of the best-selling Michael Lewis book “Flash Boys.”
The debate may sound like fodder for Wall Street alone, but it has broad implications for all Americans. Few trade stocks on a regular basis, but many are counting on a pension or 401(k) to be there for them later in life. The companies that manage America’s retirement money deal with the speed trading issue daily, and they disagree whether it’s good or bad overall. Supporters credit high-speed technology with enabling cheaper trading for large and small investors alike. Critics say that same technology is now being used to take advantage of investors.
Among the changes the Chicago Fed paper proposes is to divide trading sessions into half second periods. That’s fast for humans, but a relative lifetime for powerful computers. The hope is that a move like this could end the growing arms race between companies to create ever faster computers and data connections. Variations on this idea have been proposed before, including a 2013 paper from researchers at University of Chicago and University of Maryland recommending a similar policy, with a few key differences.
“That enormously simplifies the market because the incentive to race is gone,” says Peter Cramton, University of Maryland economics professor and a co-author of the earlier study.
Slower and simpler would seem to go hand in hand. But some question whether such a system is feasible in the contemporary financial markets, where trading happens across a myriad of different public and private venues.
“There are some definite advantages to it,” says University of Houston finance professor Craig Pirrong. “My concern is when you have multiple exchanges operating the same way, it’s a very complex interaction.”
High-frequency trading is a deeply complex and polarizing topic, with some of the loudest voices dug into hardened positions, each side waving fistfuls of data and academic studies at the other. Today’s discussion is far from the last word.
Mark Garrison: This debate matters to you. Even if you don’t trade stocks for a living, you’ve probably got a pension or 401(k). Companies managing your retirement money deal with the speed trading issue daily, and they disagree whether it’s good or bad overall. One side points to cheaper trading enabled by high-speed technology. Critics say that same technology is now being used to take advantage of investors. In this new paper, a Fed senior policy adviser calls for trading in half second periods. That’s fast for humans, but a lifetime for computers.
Craig Pirrong: The idea is that there’s too much racing going on, that there’s too much need for speed and this will cut down on that.
University of Houston finance professor Craig Pirrong says a move like this could be positive, but making it work everywhere trading happens would be tricky. Today’s call from the Fed is the latest in a long and sometimes nasty debate, made more prominent following the best-selling Michael Lewis book “Flash Boys.” But it won’t be the last word. In New York, I'm Mark Garrison, for Marketplace.