High Frequency Traders, or HFT, have been on the chopping block in the financial media, and the regular media, for quite some time. Every time the market sells off more than a couple percent, the banter that HFT are behind the down move and are out to hurt the little guy fires up almost on cue. HFT have been used as a scapegoat for any pain that the individual investor may have experienced during this seven-year bull market. The reality is, the presence of HFT is nothing but beneficial to the individual investor.
HFT offer a myriad of plusses to the individual investor. Their existence instantly increases the competition in the marketplace, as more liquidity providers are standing ready to act as the counterparty to the individual investor’s trade. This alone leads to a domino effect of advantages. Namely, this allows individual investors to trade in a market with more liquidity, at fair prices, with tighter spreads. Furthermore, even in the markets with wider spreads, HFT are willing to transact in or around the mid-price in highly liquid underlyings, again giving us individual investors better fills.
If the HFT hurt anyone, it’s not the individual investors, it’s the other financial firms. As we learn in this segment, that argument is completely nonsensical.