Plus and Minus of High Frequency Trading at Funds

                       

Small investors benefit from a reduction in trading costs, High-frequency trading helps, despite much of the notoriety it’s getting in the media. Among costs are the bid-ask spread.

                       

A wide spread means the fund must pay significantly more to acquire a stock than it could sell it for.

                       

High- frequency trading has reduced this cost by narrowing spreads, Generally, wide spreads are seen as inefficient, with buyers and sellers having difficulty agreeing on an accurate price. Narrow spreads mean the market is working better.

                       

Another transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce "market-impact" cost by making it easier to break big trades into many little ones while transacting them very quickly,

                       

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%. In addition, high-frequency trading helps bring out hidden liquidity.

                       

The positives seem to outweigh the purported negatives. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)