A few events over the last few weeks may have had retail traders scratching their heads and wondering if it is worth a small fish trading at all. Firstly, after last month’s FOMC decision the Fed released a statement to say that it is looking into suspicious trading activity in the gold market that could have been triggered by the premature release of market sensitive information.
Next up are the US fiscal issues. The US government has shut down and the country is only days away from hitting its debt limit and potentially defaulting. How do you trade events like this? Markets are moving mostly on news and stray headlines coming out of Washington, which can make trading unpredictable. Due to the government shut down not even non-farm payrolls, a big opportunity for small and large traders alike, was released.
The second point may be frustrating for retail traders but they should rest assured that it’s no easier for institutional players or hedge funds with billions under management. The outcome of the US fiscal issues is anyone’s guess right now and it’s worth bearing in mind that all traders – big and small – are frustrated with how politics is disrupting the market’s mojo.
However, the first point should be a concern for retail traders. The Fed is still investigating if news organisations released its top secret September policy decision early. Suspicions were aroused by high frequency trading activity in Chicago prior to the release at 1400hrs Eastern Time, when the Fed shocked markets by deciding not to taper its QE3 programme. The speed of high frequency trading means that a fraction of a second advantage could make a big difference to profits. The one-hundredth of a second after the 1400 ET release was the most active 10 milliseconds in the history of US stock and futures markets.
How can a retail trader either operating on their own or with a simple algo model compete with high frequency and black box trading systems on a normal day, let alone when they have an information advantage like this?
This is why it is so important for the Fed to conduct a thorough review and punish any wrongdoing. Retail traders are an important part of the market, but for them to survive their needs and limitations need to be taken into account. In contrast, high frequency traders are seen as already having an advantage over the rest of the market. Added to that, the money behind them is often anonymous, which in itself should not be a problem, but if it that money is looking for ways to game the market then it needs to be stopped.
High frequency trading is not going away. However, our central banks and regulators need to ensure it can live harmoniously with other sections of the market, including retail traders. And one thing is for sure, high frequency traders should not get away with having an unfair advantage on market moves just because of their speed.
Kathleen Brooks is author of Kathleen Brooks on Forex.