Ethics Of High Frequency Trading: Insider Information via SSRN

Daphne Sobolev
School of Management, University College London

June 3, 2016


Aim. High Frequency Trading poses a large number of ethical questions. The purpose of this study is to examine the ethical perceptions of those who work inside the HFT industry.

Method. The research consisted of a case study. Participants (N=30) were high frequency traders, algorithm developers, consultants, quant analysts, quantitative strategists, ultra low-latency data scientists, or managers of HFT companies. Participation involved an interview (N=27) or a completion of a questionnaire (N=3). HFT actors were asked to report what ethical considerations are involved in their work.

Results. Participants’ answers showed that many HFT actors considered legal and regulatory issues a central component of their ethical conduct. However, a proportion of the participants was concerned with the social contribution of their practice and with the public image of HFT. In particular, perceiving HFT as having neutral or negative effect on the market was related with sense of meaninglessness.

Conclusions. Ethics perceptions of HFT actors are characterized by a personal nature. Beyond the overlap between the notions of ethics and legality, they reflect the human tendency to search for meaning and the need to have a positive image.

Ethics Of High Frequency Trading: Insider Information – Introduction

The practice of High frequency trading (HFT) is often described as ethically controversial (Harris, 2013). In particular, Davis, Kumiega, and Vliet (2013) asserted that ethical issues arise from the interdisciplinary nature of HFT. They claimed that, as HFT involves traders, quantitative analysts, and programmers, ethical conflicts may occur. Analysing HFT ethics using procedural and distributive fairness measures, Angel and McCabe (2013) concluded that certain HFT practices are unfair. Following Zelizer (2012), MacKenzie (2014) maintained that HFT actors perform ‘boundary work’, distinguishing between ‘good’ and ‘bad’ practices. MacKenzie emphasized that, unlike market-making, trading techniques which reduce the market’s liquidity are considered unethical, though in
some cases the difference between them is unclear.

To a certain extent, the decomposition of ethics to different disciplines (Davis, Kumiega, and Vliet, 2013), different measures (Angel and McCabe, 2013), or different techniques (MacKenzie, 2014) is artificial. This is because in many HFT companies, computer programmers (code writers) work also as trades and as quantitative analysts. The notions of procedural and distributive fairness are not independent (Cropanzano and Ambrose, 2001). And, as shown below for the case of market making, ‘boundary work’ did not yield ethical perceptions which are agreed on all market participants.

The purpose of this study is to examine the way people who work inside the HFT industry perceive their practice’s ethics.

See the full paper at SSRN