High-Frequency Trading — A Government Byproduct?

Whenever the press, politicians and academics vilify a financial phenomenon, further examination almost always reveals that its bad elements are caused by regulation, not by markets — and often its consequences are good, despite what the experts claim. Case in point: the hysteria surrounding so-called high-frequency trading.

The Wall Street Journal deserves kudos here for bringing attention to something most critics (and defenders) of HFT have overlooked: the role of the government. WSJ argues that HFT is essentially a byproduct of the government’s campaign to break up the dominant New York Stock Exchange. In the process, the Securities and Exchange Commission passed regulations that effected the development and deployment of a new technological infrastructure for trading. (It looks likely that these regulations are responsible for whatever negative outcomes might result from HFT.)

What’s needed by financial markets and institutions as well as traders and consumers is not more hysteria over financial practices, but a systematic approach to slowly eliminating regulations, so that a truly free financial market can come into being. We will all be winners then.

Why are people so quick to condemn financial markets in general, and new financial phenomena in particular? To better understand the causes of this widespread animosity, I would recommend the following: