Risks and controversy

According to author Walter Mattli, the ability of regulators to enforce the rules has greatly declined since 2005 with the passing of the Regulation National Market System (Reg NMS) by the US Securities and Exchange Commission. As a result, the NYSE's quasi monopoly role as a stock rule maker was undermined and turned the stock exchange into one of many globally operating exchanges. The market then became more fractured and granular, as did the regulatory bodies, and since stock exchanges had turned into entities also seeking to maximize profits, the one with the most lenient regulators were rewarded, and oversight over traders' activities was lost. This fragmentation has greatly benefitted HFT.

High-frequency trading comprises many different types of algorithms. Various studies reported that certain types of market-making high-frequency trading reduces volatility and does not pose a systemic risk, and lowers transaction costs for retail investors, without impacting long term investors. Other studies, summarized in Aldridge, Krawciw, 2017 find that high-frequency trading strategies known as "aggressive" erode liquidity and cause volatility.

High-frequency trading has been the subject of intense public focus and debate since the May 6, 2010 Flash Crash. At least one Nobel Prize–winning economist, Michael Spence, believes that HFT should be banned. A working paper found "the presence of high frequency trading has significantly mitigated the frequency and severity of end-of-day price dislocation".

In their joint report on the 2010 Flash Crash, the SEC and the CFTC stated that "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets" during the flash crash.

Politicians, regulators, scholars, journalists and market participants have all raised concerns on both sides of the Atlantic. This has led to discussion of whether high-frequency market makers should be subject to various kinds of regulations.

In a September 22, 2010 speech, SEC chairperson Mary Schapiro signaled that US authorities were considering the introduction of regulations targeted at HFT. She said, "high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility." She proposed regulation that would require high-frequency traders to stay active in volatile markets. A later SEC chair Mary Jo White pushed back against claims that high-frequency traders have an inherent benefit in the markets. SEC associate director Gregg Berman suggested that the current debate over HFT lacks perspective. In an April 2014 speech, Berman argued: "It's much more than just the automation of quotes and cancels, in spite of the seemingly exclusive fixation on this topic by much of the media and various outspoken market pundits. (...) I worry that it may be too narrowly focused and myopic."

The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe in an era of high-speed trading", reports on the results of a survey of several dozen financial industry professionals including traders, brokers, and exchanges. It found that

• risk controls were poorer in high-frequency trading, because of competitive time pressure to execute trades without the more extensive safety checks normally used in slower trades.
• "some firms do not have stringent processes for the development, testing, and deployment of code used in their trading algorithms."
• "out-of control algorithms were more common than anticipated prior to the study and that there were no clear patterns as to their cause."

The CFA Institute, a global association of investment professionals, advocated for reforms regarding high-frequency trading, including:

• Promoting robust internal risk management procedures and controls over the algorithms and strategies employed by HFT firms.
• Trading venues should disclose their fee structure to all market participants.
• Regulators should address market manipulation and other threats to the integrity of markets, regardless of the underlying mechanism, and not try to intervene in the trading process or to restrict certain types of trading activities.

Flash tradingedit

Exchanges offered a type of order called a "Flash" order (on NASDAQ, it was called "Bolt" on the Bats stock exchange) that allowed an order to lock the market (post at the same price as an order on the other side of the bookclarification needed) for a small amount of time (5 milliseconds). This order type was available to all participants but since HFT's adapted to the changes in market structure more quickly than others, they were able to use it to "jump the queue" and place their orders before other order types were allowed to trade at the given price. Currently, the majority of exchanges do not offer flash trading, or have discontinued it. By March 2011, the NASDAQ, BATS, and Direct Edge exchanges had all ceased offering its Competition for Price Improvement functionality (widely referred to as "flash technology/trading").

Insider tradingedit

On September 24, 2013, the Federal Reserve revealed that some traders are under investigation for possible news leak and insider trading. An anti-HFT firm called NANEX claimed that right after the Federal Reserve announced its newest decision, trades were registered in the Chicago futures market within two milliseconds. However, the news was released to the public in Washington D.C. at exactly 2:00 pm calibrated by atomic clock, and takes 3.19 milliseconds to reach Chicago at the speed of light in straight line and ca. 7 milliseconds in practice. Most of the conspiracy revolved around using inappropriate time stamps using times from the SIP (consolidated quote that is necessarily slow) and the amount of "jitter" that can happen when looking at such granular timings.