There always exists a conflict between investors and traders. One extracts inefficiencies in transactions while the other attempts to define value. Technological advancements to favor the trader at investors’ expense.
Consider high-frequency trading in the American stock market. Proponents claim it’s led to tighter spreads and more liquidity for equities. On its faces this makes sense. Yet, their statements only work if you consider time dilation a problem.
Look at it this way. In a perfect world buyer and seller negotiate and settle on a price. The high-frequency trader (HFT) bridges the time gap between one to the next. This reduces exposure in between.
Yet, the argument appears hollow given the expansion of trading hours. Should market participants be forced within a narrow window, what purpose would such mediums serve? Would not the speed of information and true electronic negotiation determine price?
Their proliferation likely reduced spreads. But the real question remains…does what we give up to their profits offset the benefits of these spreads? And does their very existence actually obscure true price discovery?
