Wall Street pros: high-frequency trading hurts investors

In a survey, 70% of investment professionals also said they doubt markets are fair

By Aaron Elstein, Crain's New York

Apr 28, 2014 @ 12:50 pm EST

It's no secret that best-selling author Michael Lewis and New York state Attorney General Eric Schneiderman don't approve of high-speed trading. What's surprising is how many people on Wall Street seem to agree with them, according to a survey released last week.

But first, there are a couple of caveats to weigh before delving into the details of the report from ConvergEx Group, a brokerage firm that serves institutional money managers. The survey has a wide margin of error of 10 percentage points. What's more, the sample had only 357 respondents, including 233 fund managers and 73 folks from banks or brokerage firms. Nearly everyone who participated was a ConvergEx customer choosing to answer questions, so this wasn't a statistically robust study.

That said, it offers a peek into what the people presumably most familiar with high-speed trading think of the subject, and its results provide food for thought.

Fully 70% of those surveyed said they doubted that U.S. stock markets are "fair for all participants," and only 18% think they are. In addition, 51% agreed high-speed trading is harmful or very harmful, while only 19% deemed it helpful or very helpful. Another way to look at it is that nearly eight out of 10 investment pros surveyed by ConvergEx don't buy the argument that high-speed trading helps markets function better.

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Interestingly, 43% of participants favored more regulation, while 38% wanted the same amount, and only 19% wanted less. Perhaps most disturbing, 62% of the participants were "not confident" or "neutral" when asked if our nation's super-speedy stock markets could handle a surge in volume caused by a sudden geopolitical crisis or other shock.

Even though the value of this survey is primarily anecdotal, it does suggest a low degree of confidence in the market's mechanics and a widespread sense, even among investment pros, that the tables are tilted. Those are precisely the arguments that Mr. Schneiderman is making to explain why he's probing high-speed trading.

"We're in the early stages of a lot of investigations," Mr. Schneiderman said at a forum last week sponsored by Crain's. "Whistle-blowers are starting to come forward, and I think we're going to do substantial work in this area over the next year."

Wall Street isn't going to wait while regulators poke around, which seems only fitting for the twitchy world of high-speed trading. As ConvergEx Chief Market Strategist Nicholas Colas observed, "Make no mistake: When 70% of market professionals think the game is unfair, that game is going to change."

A version of this article appears in the April 28, 2014, print issue of Crain's New York Business.

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