The opposing viewpoints of these two veteran executives hint at the dilemma facing regulators as they try to determine whether to rein in high-frequency trading, which now accounts for at least half of all trading activity on U.S. exchanges.
Using sophisticated technology to execute transactions at blink-of-an-eye speeds, high-frequency traders have raked in billions of dollars worth of profits — a penny at a time — over the past few years. The ultimate question remains whether the value these firms bring outweigh the potential problems, from technological glitches that can trigger huge market disruptions to perceptual issues of fairness in the marketplace.
Brooks, who has spent more than 30 years at the T.Rowe Price trading desk, sees them as opportunists that are out to game the system without any regard for the fundamentals of the market. “Their game is about speed. It has nothing to do with investing,” he said. “They’ve found a loophole that needs to be closed.”
But Sauter says these traders are a lubricant for the stock market’s engine, providing liquidity and helping cut down transaction costs for all long-term investors.
“We do disagree on this one,” said Sauter, responding to Brooks’s comments. “I believe that there are some high-frequency traders who are trying to take advantage of us, but we are far better off with high-frequency trading than we are without it.”
An evolution of trading
Both men joined their respective firms at a time when the trading landscape was dominated by the New York Stock Exchange, which relied on specialists to match buyers and sellers on the exchange floor.
They witnessed the slow transition from manual to automated trading, which gained traction in the late 1990s when the Securities and Exchange Commission allowed electronic trading venues to compete with legacy exchanges.
As these venues proliferated, the SEC stepped in again in 2005, initiating a regulation designed to ensure that investors received the best available price for a stock. The rule allowed traders to bypass venues that did not immediately respond to their orders.
The changes prodded the NYSE to automate, and high-frequency traders flourished. Finally, they could use their high-speed tools to efficiently trade big-name stocks.
They do so by programming their computers to continuously scan the nation’s 13 exchanges and dozens of private trading venues, pouncing in a fraction of a second when they spot fleeting and tiny pricing inconsistencies.
While their techniques differ, the one known as “market making” has the most relevance to long-term investors. High-frequency traders engaged in that strategy stand ready to buy and sell at aggressive prices, injecting liquidity into the market, Sauter said.