A Business School Wonders: Why Not Teach High-Frequency Trading?by
Business schools have long ties to high-frequency trading, the platforms that let computers buy and sell securities in milliseconds but have been declaimed by critics for making markets riskier and more volatile. Professors hone sophisticated trading algorithms, and students have gone on to lead some of the country’s largest electronic-trading firms. Now, at least one business school is considering taking that relationship to the next level.
The dean of Imperial College Business School in London sees an educational opportunity in what he says is a rising demand for the people behind the algorithms, despite declining profits across the industry, which reaped $1 billion in 2012, down from $5 billion in 2009, according to a Bloomberg Businessweek report.
“The fact is that even today there is [a] lot of high-frequency trading going on, lots of people trading on quantitative models,” said G. “Anand” Anandalingam, Imperial’s dean, in an interview with the Economist. “The question we are grappling with is: If there is huge demand for those sorts of people, and we are able to produce students who can do that really well, should we not be in that business?”
In the interview, Anandalingam noted that “at some level a business school like us has to have a strong ethics education.” The morality of high-frequency trading has been a matter of pitched debate, especially since Michael Lewis, who writes for Bloomberg View, released a critical book on the subject earlier this year. The industry has come under increased scrutiny, and the Securities and Exchange Commission has launched a probe into 10 high-frequency trading firms, according to a Reuters report last month.
“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” SEC Commissioner Daniel Gallagher told CNBC earlier this year. “That perception to me is a reality. It’s something we need to address.”
Imperial’s dean seemed to acknowledge the potential risks of training the next leaders in the ways of an industry that some have accused of fundamentally skewing the playing field for regular investors.
“I have a personal dilemma. We want to train our students to be successful. At the same time we want to make sure their success doesn’t lead to calamities around the world,” said Anandalingam. Referring to speed trading, he said, “You can’t wish it away. And it is not illegal.”
Anandalingam also said that teaching the quantitative foundation of high-speed trading would not be a stretch for Imperial, which is “known for science and technology.”
Several prominent business school faculty members have focused on high-frequency trading in their research. Professors at Columbia Business School, Chicago Booth School of Business, and Massachusetts Institute of Technology’s Sloan School of Management have investigated how profitable electronic trading is, the culpability HFT firms may have for the so-called Flash Crash of 2010—when a software glitch sent markets into disarray—and whether the industry makes it faster and easier to trade securities.
In fact, David Whitcomb, whom Fortune magazine calls “the father of high-frequency trading,” started the first modern high-speed trading firms while at Rutgers University’s Graduate School of Management. In between teaching finance classes, Whitcomb developed formulas that predicted future changes in a stock’s price. He founded Automated Trading Desk, or ATD, to mine a strategy that’s become the raison d’être of a billion-dollar industry: speed, measured in flashes of time. Today, speed-trading firms compete for a one-millionth-of-a-second advantage. But in 1988, all Whitcomb had to do was be better by one second.
“Not only did ATD have a better idea of where prices were headed, it executed trades within one second—a snail’s pace by today’s standards, but far faster than what anyone else was doing then,” reported my colleague Matt Philips. “Whenever a stock’s price changed, ATD’s computers would trade on the offers humans had entered in the exchange’s order book before they could adjust them, and then moments later either buy or sell the shares back to them at the correct price.”
Whitcomb sold ATD to Citigroup in 2007 for $680 million. He’s now working on building a tennis racquet with an oversize sweet spot, according to Fortune.