SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Does HFT Harm Individual Investors?


What is the overall impact of High Frequency Trading (HFT)? Some traders believe that the use of algorithms in super-fast and powerful computers allows large hedge funds and other institutions to beat the market, implying that because these big traders can out-perform individuals, profits are unfairly gained. But is it true?

With the ability to enter thousands or even millions of trades on multiple exchanges, and in fractions of a second, arbitrage is taken to new heights. This volume of relatively small trades in large volume adds up to a lot of money.
 

The advantage comes from exploiting small disparity in bid/ask spreads between exchanges, momentarily inefficiency in pricing, and momentary changes in stock price trends. This is seen by manty as unfair. But here’s the big question: Yes, it is unfair, but does it adversely impact what you can earn in your own portfolio?


This is where doubt enters the picture.


A changing landscape


Two points: First, even with an advantage for the big traders using powerful algo systems, the individual investor probably was never impacted at all (pointing out the differences between something being “unfair” versus harming profitability for smaller investors). Second, the one-time advantage of HFT has disappeared and no longer is as factor.


It’s comparable to the auto business. When Ford began using the assembly line to mass produce cars, his operation was the only game in town. By 1909, there were 272 auto manufacturers in operation (How Did Detroit Become Motor City?)


The point is that good ideas tend to bring in more competition, a basic economic reality. And more competition means less market share to go around. This is exactly what has happened to HFT. It has become unprofitable because too many institutions are practicing this system. The overall profit pool due to arbitrage and HFT usually does not beat the market any more, as it did only a few years ago.
 

Overall, HFT-generated profits might still present a small advantage, but it is distributed over so many institutions that the algo and computer investment is not yielding the kind of profits you might expect. With too many players, the profit pool has been diluted. Consequently, the unfair advantage once enjoyed by the big institutions has disappeared.


Image result for HFT

 

Slow regulatory response


The trend came to an end so rapidly that regulators and politicians did not have time to figure out how to control or stop HFT. Among the disturbing aspects of the practice was that according to some critics, exchanges were giving HFT traders priority in trade execution. This would be disturbing if the practice was having an impact on profits for retail investors. But no laws were being broken at the time, and the popularity among institutions brought about the demise of HFT.
 

Forbes published an article on this topic in March 2017 (Don't Worry, Be Happy - High Frequency Trading Is Over, Dead, It's Done). The story points out that “HFT has gone from invention, though something many opposed, to it now being a boring and unprofitable part of the basic infrastructure of the markets. We've had the entire cycle, the entire economic technology cycle, in only a couple of decades.”


The disappearance of HFT’s advantage helps options traders, perhaps more than most others. Using options to hedge equity positions with well-timed trades, as it turns out, continues to be more beneficial than the minor profits that must be shared among many institutions.

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 158 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 219 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 619 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 250 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 228 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 501 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 281 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 378 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 501 views
  • Accurate Expiration Counting

    Options traders are rightfully concerned with the number of days to expiration of an option. At the time the position is opened, whether long or short, the issue of time decay must be at the forefront of risk evaluation. But is this performed accurately?

    By Michael C. Thomsett,

    • 0 comments
    • 413 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido