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The lowdown on high frequency trading

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High frequency trading (HFT), which is like day-trading on near fatal doses of amphetamines, sometimes seems like an investment fringe activity. In reality, it is central to how people trade now. Estimates vary, but Andy Nybo of Tabb Group estimates that HFT strategies account for 61% of trading activity in US equity markets. Perhaps the least defendable form of HFT is something called flash trading, at least pertaining to equities. However, in the options world, eliminating flash orders would create added cost to customers if their orders are redirected to another exchange and that exchange has a maker taker pricing structure. Many traders argue that high frequency trading, even when it doesn't involve flash orders, invariably involves front running and, therefore, should be illegal. In a discussion on high frequency trading from Futures Industry magazine's January 2010 issue, Don Wilson of DRW argues that HFT is not front running.

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