“In the wake of the publication earlier this year of “Flash Boys”, a book that criticised high-frequency trading (HFT)—the use of algorithms to buy and sell shares and other financial assets at vanishingly short intervals—regulators and investors have been debating whether and how to curb it. One mooted response is to introduce deliberate delays before trades are executed. Another is to shuffle the order in which they are processed. HFT firms maintain that no change is needed, on the grounds that they help to lubricate markets by increasing volumes and ironing out inconsistencies in prices. But a recent paper argues that they do indeed create inefficiencies and suggests a more fundamental reform to how markets operate in order to stave them off.
“Flash Boys” took HFT firms to task for a strategy called front-running. When an investor is buying or selling a big block of shares, it is common to split the order across multiple exchanges (say, the NASDAQ and the NYSE) in search of a better overall price. HFT algorithms can observe the order on one exchange and “front-run” the investor to the next one, buying up the available stock there and selling it to the sluggish investor at a higher price.”
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