High frequency trading’s industrial-sized business model is making markets unfair, according to Peter Berdeklis, head of algorithmic trading, Maple Financial Group. Berdeklis spoke at Toronto-based Alternative Investment Management Association (AIMA) Canada’s 11th annual debate on Tuesday.

“[High frequency traders] will tell you their business is arbitrage and market making which we all agree are beneficial to market efficiency,” said Berdeklis, “but both those businesses were present long before HFT and they never looked like we see in markets today.”

Through technology, high frequency traders can constantly place orders first, said Berdeklis, which in turn allows them to consistently put other investors at a disadvantage through the use of adverse selection. Adverse selection is a strategy often used by traders in bear markets in which a trader fills an order on a bad trade and partially fills an order on a better trade. Since high frequency traders can react fastest to market changes they are able to grab the upside of these trades while leaving slower participants on the bad side of the transaction.

“HFT shops will call this market making because they don’t care if they’re long or short,” said Berdeklis, “but market makers step in when no one else will [and] that’s not the HFT strategy. They’re only interested in being at the front of a very long queue because the business of high frequency trading is the industrialization of adverse selection.”

While not illegal like front running or insider trading, Berdeklis sees HFT as being just as unfair. “[High frequency traders] argue that all they’ve done is paid for the best access and anyone can do the same and compete but it’s not the better access that makes markets unfair,” he said. “It’s the HFT business model. A business model that can only exists because of the special access they’ve engineered over years.”

Contrarily, Doug Clark, managing director, research, ITG Canada, argued HFT has no impact on the fairness of markets at the debate. Rather than acting as a detriment, Clark said HFT has helped markets by reducing trading costs and linking liquidity.

“High frequency players and global high frequency traders have taken the game to a new level,” said Clark. “They’re no longer trading Scotia against National Bank or TD – they trade against those three but also Royal Bank of Scotland, or Citigroup, JP Morgan. They have a greater ability to link liquidity without an adverse affect on the market.”

Overall, Clark admits HFT is not perfect and there are some bad actors and practices. But these issues are a small part of all activity, said Clark, and can be removed with a “scalpel-like approach. ” On the whole, however, Clark sees HFT as a net positive for markets. “[High frequency traders are] not curing cancer but they’re not killing kittens either,” he said. “So, high frequency trading is not all good but in aggregate it is good.”