High-frequency trading (HFT)

High-frequency trading (HFT)

HFT makes use of powerful machines to perform complex algorithmic transactions that take advantage of minute price differences. HFT advantages include greater market liquidity, increased market performance, lower prices, and higher profitability.

Illegality of HFT

HFT is illegal because it has a negative effect on the economy and is abused for commercial gain by consumers. Any players who use HFT for their own gain do not regard the common interest as proposed by utilitarianism, making the practice unethical. HFT enables firms to manipulate the market by placing non-bona fide trades that cause a shift in market demand and supply promoting the trade in stocks that would otherwise not have occurred. The companies then cancel the non-bona fide trade after earning from limit options and guiding markets to a given direction, which is unethical.

Inequity in HFT

HFT is unethical because of the inequity it causes to small investors by creating an uneven playing field for investors as the information and resources available to HFT firms is enormous. Information asymmetry favors HFT firms and disadvantages small investors. HFT firms seek to profit at the expense of other market players who have to pay higher prices for the shares as is the case in front running. The focus on the social benefit is not the sole reason for market manipulation and front running by HFT firms making the practice unethical.

Ethics of HFT

HFT in itself is ethical, but when corporations misuse high-frequency trading for their benefit resulting in harm to other investors, profiting illegally, and potentially causing harm to the entire market inform of market crashes, it is unethical. However, the digital divide between analog and digital realities including HFT prevents the formation of effective strategies to prevent or even detect unethical behavior in HFT. HFT provides an example of a beneficial technological advancement with possibilities of unethical use.