The following is an excerpt from Chris Dieterich | October 9, 2015 | Barrons.com |
High-frequency trading is important to the market for exchange-traded funds. Is that good or bad?
It’s an old (and heavily freighted) question made relevant again given that Hillary Clinton is proposing a new tax targeting the hard-to-define world of HFT. More on that in moment.
In June, Ana Avramovic at Credit Suisse estimated that high-frequency trading firms represent 70% of ETF trading, compared to about 50% of trading in single stocks.
Why so high? For one thing, HFT firms have been drawn by ETFs because they’re easy ways to express views on changing macro-economic conditions. Another reason is structural: somebody needs to act on the “arbitrage” opportunities that exist between ETF prices and the prices of the underlying stocks. The potential for market makers (increasingly HFT firms) to profit is, basically, what keeps the SPDR S&P 500 (SPY) in line with the values of the basket of stocks in the S&P 500 index.
Back to Clinton. Bradley Hope at The Wall Street Journal dives into the HFT-specific aspects of the broad proposals for the financial system laid out by Clinton on Thursday:
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