Robo-trading: the superfast stockbroking strategy that affects your retirement funds

Advocates of HFT argue that it provides additional liquidity and so narrows the gap between buying and selling prices. Yet when market conditions turn adverse, HFT firms can switch off their robo-traders and then liquidity vanishes – as we saw in the “fla

The image of a crowded trading floor with brash young stockbrokers shouting into telephones has ceased to be representative of how most financial assets are traded. Most of today’s trading has migrated from trading floors to virtual electronic exchanges. The benefits include a more efficient system, because they provide liquidity and transparency, and also better price execution. However, in the past few years, an insidious new trend, “high-frequency trading” (HFT), has developed and is spreading stealthily.

A few critical factors explain the rapid development of HFT: the increase in computing power available to investment banks and trading firms, for example, and the deregulation of many stock exchanges in the United States and Europe.

HFT firms employ smart programmers to develop algorithms that can assess market conditions and enable computers to issue thousands of buy and sell orders automatically in less than a second. In this world, speed is everything. Certain exchanges are renting space to trading firms to allow them to locate their computers as close as possible to the exchanges, in order to reduce what is known as “latency”.

In another effort to obtain a speed advantage (of roughly six milliseconds), a dedicated transatlantic cable is being laid to connect London with New York.

Some exchanges are also selling real-time price information to the HFT firms, allowing the latter to obtain prior knowledge of order flow. This enables them to place buy or sell orders ahead of the average individual or institutional investor. (This is analogous to being in a line to buy tickets for the theatre and, as you approach the front of the queue, a tout appears ahead of you to buy the last ticket for, say, £30, then immediately sells it to you for £35.)

These speed and information advantages allow HFT firms to reap millions of dollars of low-risk profits by, in effect, “scalping” pennies off each trade. Because of the huge volume of trades, this adds up to billions of pounds overall.

So what does this mean for you and your retirement funds? Advocates of HFT argue that it provides additional liquidity and so narrows the gap between buying and selling prices.

Yet when market conditions turn adverse, HFT firms can switch off their robo-traders and then liquidity vanishes – as we saw in the “flash crash” of 6 May 2010, when the US market fell by 9 per cent in minutes. Even in normal market conditions, the algorithms used by HFT can increase the volatility of stock prices, which in turn affects the price for those investing your pension money.

What can be done? One simple idea is to limit trading firms’ ability to buy and sell in time increments of less than a second, or to impose a tax or tariff on trades that are held only for such a short time frame.

What is certain is that if nothing is done, pensioners who have saved all their working lives will lose out to the robo-traders that determine most of the current action in the stock markets.

Most financial assets are handled in a very different way to this nowadays. Image: Getty

This article first appeared in the 17 October 2013 issue of the New Statesman, The Austerity Pope

Photo: Martin Whitfield
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Labour MP for East Lothian Martin Whitfield: "I started an argument and ended up winning an election"

The former primary school teacher still misses home. 

Two months ago, Martin Whitfield was a primary school teacher in Prestonpans, a small town along the coast from Edinburgh. Then he got into an argument. It was a Saturday morning shortly after the snap election had been called, and he and other members of the local Labour party began discussing a rumour that the candidate would be an outsider.

“I started an argument that this was ridiculous, we couldn’t have a candidate helicoptered in,” he recalls. He pointed out that one of the main issues with the Scottish National Party incumbent, the economist and journalist George Kerevan, was that he was seen as an outsider.

“I kept arguing for an hour and a half and people started gently moving away,” he jokes. “About two days later I was still going on, and I thought enough’s enough.” 

He called Iain Gray, the Scottish Labour veteran, who interrupted him. “He said, 'Right Martin, are you going to put up or shut up?’ So I filled in the forms.

"Then I had to have a very interesting conversation with my wife.”

One successful election campaign later, he is sitting in the airy, glass-roofed atrium of Westminster’s Portcullis House. Whitfield has silver hair, glasses, and wears a Labour-red tie with his shirt. He looks every bit the approachable primary school teacher, and sometimes he forgets he isn’t anymore. 

I ask how the school reacted to his election bid, and he begins “I have”, and then corrects himself: “There is a primary four class I had the pleasure to teach.” The children wanted to know everything from where parliament was, to his views on education and independence. He took unpaid leave to campaign. 

“Actually not teaching the children was the hardest thing,” he recalls. “During the campaign I kept bumping into them when I was door-knocking.”

Whitfield was born in Newcastle, in 1965, to Labour-supporting parents. “My entire youth was spent with people who were socialists.”

His father was involved in the Theatre Workshop, founded by the left-wing director Joan Littlewood. “We were part of a community which supported each other and found value in that support in art and in theatre,” he says. “That is hugely important to me.” 

He trained as a lawyer, but grew disillusioned with the profession and retrained as a teacher instead. He and his wife eventually settled in Prestonpans, where they started a family and he “fought like mad” to work at the local school. She works as the marketing manager for the local theatre.

He believes he won his seat – one of the first to be touted as a possible Labour win – thanks to a combination of his local profile, the party’s position on independence and its manifesto, which “played brilliantly everywhere we discussed it”. 

It offered hope, he says: “As far as my doorstep discussion in East Lothian went, some people were for and against Jeremy Corbyn, some people were for and against Kezia Dugdale, but I didn’t find anyone who was against the manifesto.”

Whitfield’s new job will mean long commutes on the East Coast line, but he considers representing the constituency a “massive, massive honour”. When I ask him about East Lothian, he can’t stop talking.

“MPs do tend to say ‘my constituency’s a microcosm’, but it really is Scotland in miniature. We have a fishing industry, crabs and lobsters, the agricultural areas – the agricultural soil is second to none.” The area was also historically home to heavy industry. 

After his first week in Westminster, Whitfield caught the train back to Scotland. “That bit when I got back into East Lothian was lovely moment,” he says. “I was home.”

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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