Who sets the speed limit on trading?

How can high-frequency trading firms communicate?

It’s been a bad two weeks for high-frequency trading. The industry took body blows from author Michael Lewis ("rigged market"), icon Charles Schwab ("growing cancer"), and news about SEC inquires. Even the FBI touched the industry.

High-frequency trading firms’ reputations are getting dinged. However, most such companies have been reluctant to speak broadly to the media to burnish that reputation, in part, we think, for a simple reason: their business is highly complex. Crucial details can be omitted because of space or a reporter’s inexperience. Firms may be reluctant to meet an insightful journalist.

What speeds are we talking about? The blink of an eye is sluggish in high-frequency trading world. They’re seeking price discovery in the millionths of a second (eyes blink in thousandths of a second). Much of what high-frequency traders do in those microseconds and how it’s packaged and transmitted is proprietary. So discussing details to the media could compromise their advantage to other firms, not to individual investors.

How can high-frequency trading firms communicate? Bylines and blogs are the best vehicles to discuss highly complex messages. Some firms are using them. Most aren’t commenting at all. Silence is a courtroom privilege, but it can be downright destructive for a reputation. 

The industry has a nascent bipartisan trade group, Modern Markets Initiative, founded this year by advisers to President Barack Obama and Mitt Romney.  It’s clearly been active in the last week. But they won’t win the perception game only by playing defense. Broader benefits of high-frequency trading, such as those cited in Matthew Phillips’ Bloomberg Businessweek article, need to be embedded in the minds of market players and even the broader public. High-frequency trading firms aren’t bad just because they’re big and fast.

High-frequency traders need to be on guard about misdirected reporting, and reporters need to avoid sensationalism. For example, some reporters wrote last week that in addition to the SEC, the FBI was investigating such firms. That’s inaccurate. The FBI was asking firms if they knew of wrongdoing. It’s the difference between seeking a witness and a suspect.

This brings up new industry questions: who sets the speed limits on Wall Street? And how fast is too fast? Some might argue that high-frequency price discovery is no different than the speedy insight of a sharp sell-side analyst.  However, if firms are sharing price discovery, some might see it as veering dangerously close to price-fixing and collusion.

John McInerney is group VP at Makovsky. Email him at jmcinerney@makovsky.com.

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