High Frequency Trading Undermines CSR and is "Unsafe at Any Speed"

High Frequency Trading (HFT) is an irresponsible and unethical business practice which goes against all principles of CSR. Terms like "flash order" and "naked access" might seem to have sexy connotations, but not only do these high frequency trading practices ratchet up market short-termism, but they heighten asymmetric information which is antithetical to a well functioning efficient market. Furthermore, it is a strategy which manipulates stock prices and undermines the stability of the financial markets which are still quivering from post traumatic stress syndrome.

HFT is a practice which utilizes high speed computers and complex algorithms for so-called "price discovery." A flash order is when exchanges offer privileged participants using high speed computers the ability to see trade orders before anyone else. Naked access gives privileged undercover access to exchanges to a chosen few. At a time when we're calling for more transparency in financial markets, these traders operate in a black box environment and create dark pools which means no one knows what they're up to - yet they get to see everyone else's trade orders in advance.

The idea that sophisticated traders come in and find under or over-valued securities and bring the prices into line with "real" value, is the selling point of technological practices such as HFT. Small price differentials are not as evident on monthly or even daily terms. However, in the tiniest intervals between trades - the tick by tick data - the most minuscule difference can be shaved off via these complex computer programs reaping gargantuan profits for those very few technologically advantaged firms.

If they are engaged in actual price "discovery," then why do they need a sneak preview of everyone else's orders? At their high speeds HFT traders edge out slower traders and remove any semblance of human response time, how can this be "efficient?" Unless of course efficiency means gaming the system at everyone else's expense. Karl Denninger writes at market-ticker.org about how the so-called liquidity resulting from HFT traders creates an "ugly snapback," as the momentum they put in place on the upside snaps back on the downside. Not only that, but they manipulate the prices as then can see other traders' limit orders. According to Denniger, this diminishes the value of portfolios held by us common folks, while enriching the very institutions which got us into the financial crisis in the first place. This shaving off of bits at a time is reminiscent of King Louis XIV shaving off silver and debasing the currency of France. How is this not debasing the financial values, as it changes the level of markets without any true assessment of a stock's value?

Quantitative finance expert Paul Wilmott wrote an op-ed in the NY Times: "Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines and they're playing games with real businesses and real people."

John Katovich, of the Katovich Law Group (a B Corporation), said of HFT: "In general, it diminishes the connection between investors and companies, making equity ownership more ephemeral, more short-term, less likely to lead to a long-term responsible relationship between companies and their so-called owners. It puts the entire system more on autopilot. It may make social and environmental engagement with companies more difficult, because the tenure of ownership is so abbreviated that it ceases to constitute a real human relationship. More immediately, there are two key risks - systemic risk, and the risk of market manipulation."

Senator Charles Schumer has raised a red flag about HFT and the SEC is looking into the practice. Still, I would implore the in the CSR community to be vigilant and to speak out against this deplorable practice. To quote management guru Peter Drucker, "Nothing is less productive than to make more efficient what should not be done at all."

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