The low ethics of high-frequency trading


Imagine if your ability to feed your family depended upon how fast you could run. Imagine the aisles of your grocery store as lanes on a running track. If you can outrun your fellow shoppers, grab food off the shelves and race through the checkout at the finish line, then your family gets to eat. If not, then your family starves.

This "survival of the fleetest" would obviously be considered an unethical way to determine whose family gets to eat today. So why should it be considered an ethical way to determine whose family gets to invest for tomorrow?

In my last two posts on data ethics, I explored the questionable practices of free internet service providers and users. This post is going to look at ethical problems in a new area: the multi-billion dollar world of high-frequency trading, which is responsible for almost 99% of trades on the U.S. stock market. High frequency trading works like this: people with access to high-speed, fiber optic cables with advanced algorithms can use them to buy and sell shares in milliseconds. Those cables, however, cost millions of dollars per year, meaning only the wealthy elite can afford to use them.

John Naughton recently wrote a review of Flash Boys, the new book by Michael Lewis. “It explains in user-friendly terms how the colossal profits of high-frequency traders really amount to an unconscionable tax on the ordinary investor, or at any rate on the pension funds and other financial institutions on which our livelihoods depend.”

Flash Boys tells the story of Brad Katsuyama, a trader who discovered the extent to which high-frequency traders were skewing the stock market and screwing investors. This led him to set up a new stock exchange (IEX) designed to level the playing field by making sure everyone’s trading instructions arrived at the same time.

“But the most interesting thing about Flash Boys,” Naughton explained, “is what it reveals about the networked world into which we have stumbled. The stock market has become an interactive, computer-driven system of staggering complexity. And it turns out that there are several sides to this complexity: for the banks and the high-frequency traders who exploit it, it’s a marketing tool for bamboozling investors and a means of intimidating regulators; and for smart programmers and entrepreneurs it offers limitless opportunities to play the system.”

High-frequency trading, Naughton concluded, “is a good illustration of one of the central problems that society will have to address in the coming decades: the collision between analogue mindsets and digital realities.”

Many of our traditional notions of ethics are stuck in an analogue mindset. The new digital realities of big data, and the algorithms we trust to shape those realities, should give us pause to consider the roles we need ethics to play in our data-driven world.

Part of the challenge, however, is that for every second we pause to ponder these ethical dilemmas, high-frequency traders have executed another 75 trades (since their algorithms can execute one trade approximately every 13 milliseconds). Perhaps ethics, therefore, is simply too slow to catch up.

What do you think? Share your thoughts below.


About Author

Jim Harris

Blogger-in-Chief at Obsessive-Compulsive Data Quality (OCDQ)

Jim Harris is a recognized data quality thought leader with 25 years of enterprise data management industry experience. Jim is an independent consultant, speaker, and freelance writer. Jim is the Blogger-in-Chief at Obsessive-Compulsive Data Quality, an independent blog offering a vendor-neutral perspective on data quality and its related disciplines, including data governance, master data management, and business intelligence.

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