December 12, 2010
While high frequency traders have been much maligned in the media, they do provide some benefit to the market. HFTs improve the national best big and offer which results in tighter spreads for the rest of the market and in particular retail investors. They provide liquidity that wouldnt otherwise be there and they lower the cost to trade for retail investors. Hindering these traders by imposing a minimum requirement on the duration of orders would increase the adverse selection effect which would widen spreads and increase trading costs for retail customers. If the SEC really wants to combat the negative effects of HFTs they should examine returning to nickel or dime quotes. This change would cut down on quote jumping and front running.