Ethics in High-Frequency Trading

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Introduction

High-frequency trading (HFT) utilizes powerful computers to execute complicated algorithmic trades taking advantage of minute discrepancies in prices. The benefits of HFT include improved liquidity of markets, augmented market efficiency, reduced costs, and increased profitability. High-frequency trading has revolutionalized stock market trade from the increased volumes of trade it has facilitated and improved efficiency in undertaking stock trade in global stock exchange markets. The trading speeds have increased with the decision by firms to move their servers near exchange computers. HFT are beneficial for the firms and traders and have promoted the achievement of investor goals mainly for firms. HFT firms have a unique chance to earn huge profits from minute discrepancies in prices opening the way for unscrupulous activities that may cause unethical behavior. This study seeks to review the aspects of HFT that make the practice unethical.

HFT is unethical when it results in adverse impacts on the market and its abuse for personal benefit to the users. The greater good as advocated in utilitarianism is not considered by some players utilizing HFT for their personal benefit making the practice unethical. HFT enable firms to manipulate the market by placing non-bona fide trades that cause a shift in market demand and supply promoting the trade in stocks that would otherwise not have occurred. The companies then cancel the non-bona fide trade after earning from limit options and guiding markets to a given direction, which is unethical. The profits earned from the manipulation of the market are illegal and results in the benefits to a few investors and stock market players with the resources and capability to conduct HFT. The benefit of the greater good is not considered by these companies making manipulation using HFT unethical. HFT is also unethical because of the cascading effect where a fall in stock prices cause traders to bet on continuous decline triggering further decline sales by HFT firms. The cascading effect may result in a market crash causing losses to investors and could cause a loss of confidence in the stock market.

HFT is unethical because of the inequity it causes to small investors by creating an uneven playing field for investors as the information and resources available to HFT firms is enormous. Information asymmetry favors HFT firms and disadvantages small investors. The proliferation of HFT prevents small investors from accessing similar trading opportunities as HFT firms; reducing their chances of profits. The unfair operating environment for small and large investors created by HFT use makes the practice unethical. HFT firms seek to profit at the expense of other market players who have to pay higher prices for the shares as is the case in front running. The focus on the social benefit is not the sole reason for market manipulation and front running by HFT firms making the practice unethical.

HFT in itself is ethical, but when corporations misuse high-frequency trading for their benefit resulting in harm to other investors, profiting illegally, and potentially causing harm to the entire market inform of market crashes, it is unethical. However, the digital divide between analog and digital realities including HFT prevents the formation of effective strategies to prevent or even detect unethical behavior in HFT. HFT provides an example of a beneficial technological advancement with possibilities of unethical use. There is a need for HFT firms to collaborate with regulators and policy makers to ensure HFT is not used unethical and is designed to benefit all.

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