A CFTC economist says he has found that high-speed trading firms are grabbing significant profits away from traditional investors. The study by Andrei Kirilenko, chief economist at CFTC, is being reviewed by his peers and has encountered opposition, the New York Times noted in an article.
Some observers, such as Terrence Hendershott, a professor at the University of California, Berkeley, criticized the study for focusing just on profits and failing to address the benefits high-speed traders bring. He said the competition between high-speed traders has helped lower the cost of trading for ordinary investors. However, he conceded that the limited data available to researchers made it hard to determine whether the benefits outweighed the costs.
Still, the study reignites the high-frequency trading debate at a time when critics of the practice have been focusing on a series of high-profile technical glitches that have occurred sometimes within split seconds in an increasingly electronic marketplace where any trading mistakes can have a huge impact on the financial system.
Plus, the latest study’s numbers are pretty incendiary: Kirilenko reports that high-frequency traders make an average profit of as much as $5.05 each time they go up against traditional traders buying and selling one of the most widely used financial contracts.
The most aggressive traders scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract, the NYT reports.
Large investors can trade thousands of contracts at once to bet on future shifts in the S.& P. 500 index. The average aggressive high-speed trader made a daily profit of $45,267 in a month in 2010 analyzed by the study.
CFTC has not endorsed Kirilenko’s findings. But Bart Chilton, one of five C.F.T.C. commissioners, said that “what the study shows is that high-frequency traders are really the new middleman in exchange trading, and they’re taking some of the cream off the top.”
The study comes as a council of the nation’s top financial regulators is showing increasing concern that the accelerating automation and speed of the financial markets could represent a threat to investors and to the stability of the financial system.
The Financial Stability Oversight Council, an organization formed after the recent financial crisis to deal with systemic risks, took up the issue at a meeting in November. The meeting, which included Treasury Secretary Timothy F. Geithner and Federal Reserve chairman Ben Bernanke, said in its annual report this summer that recent developments “could lead to unintended errors cascading through the financial system.” The C.F.T.C. is a member of the oversight council.
Kirilenko’s study focused on one corner of the financial markets that the C.F.T.C. oversees, contracts that are settled based on the future value of the Standard & Poor’s 500-stock index. He and his co-authors, professors at Princeton and the University of Washington, chose the contract because it is one of the most heavily traded financial assets in any market and is popular with a broad array of investors, the New York Times said.
Kirilenko is about to leave the C.F.T.C. for an academic position at the Massachusetts Institute of Technology.
He warned last week that smaller traders might leave the futures markets if their profits are drained away, choosing instead to operate in less transparent markets where high-speed traders will not get in the way.
Bart Chilton said the study would make it easier for regulators “to put forth regulations in a streamlined fashion. It’s a key step in the process and it should fuel-inject the regulatory effort going forward.”