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HFT Critics Call CFTC Economist's Study “Groundbreaking”

"Something should strike you that this paper is unique when it comes to academic literature on HFT," Themis Trading's partners say.

While high-frequency trading firms continue to struggle in the face of the slowdown in equity markets, HFT critics are calling a new study on the practice, which has just been released by a CFTC economist, “groundbreaking” in demonstrating how high-speed traders gain their profits.

[Read: Eladian Closure an Ominous Sign for High-Frequency Trading to learn more.]

While the study - as we reported yesterday - has stirred up a certain amount of resistance from some market observers, who say it fails to address the benefits high-speed traders bring to the market, such as lower costs of trading for ordinary investors, vocal high-frequency opponents at Themis Trading say the paper is unique in the methods it uses to prove its point.

“Something should strike you that this paper is unique when it comes to academic literature on HFT,” Themis Trading’s Joe Saluzzi and Sal Arnuk said in a statement.

“The second sentence reads ‘Using transaction level data with user identifications, we find that high frequency trading (HFT) is highly profitable.’ The unique part is not that HFT is profitable (we all know that), it’s that Kirilenko and his fellow authors were able to use data that had “user identifications”. This means they were not guessing, which is what most other academic literature does since it usually relies only a sample set of data that is provided by the exchanges.”

The Themis partners also highlight findings from the report such as the fact that “HFT’s profits are persistent, new entrants have a higher propensity to underperform and exit, and the fastest firms (in absolute and in relative terms) make up the upper tail of performance. ”

They also point out that the fact that data on high-speed trading profits suggest there is a “strong profit motive for liquidity taking rather than liquidity providing.

Saluzzi and Arnuk suggest the report is a good beginning, but still leaves a number of questions unanswered.

“The paper left us wondering: Who are these handful of aggressive HFT’s that consistently make money trading the e-minis? Are they large enough to be doing what is known as “momentum ignition” in the most liquid futures contract in the world? What effect is this type of trading having on other asset classes? Is this type of trading purely momentum and divorced from economic fundamentals?” Further, the study only analyzes futures data, they point out. Most large HFT’s trade in multiple asset classes including stocks, ETF’s, futures, options and currencies. “We know that HFT’s make their money differently in the equities market. The concepts of rebates, order types and data feeds are much more important in the equities space.”

As such, one should wonder how much money is being made and what is actually going on in all those other asset classes, Themis’s partners contend.

HFT critics such as Themis Trading now hope the SEC and stock exchanges will produce their own detailed report on the impact of high-frequency trading on the market.

In the meantime, it looks likely that the controversial issue of high-frequency trading with its pros and cons will continue to ignite the market-place for the foreseeable future.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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