How do we decide what’s fair?

High-frequency traders (HFT) are under fire once again and this time one of the world’s most famous investors, Warren Buffet, has waded into the debate on unfairness.

Last week, Business Wire, owned by Buffet’s Berkshire Hathaway investment vehicle, stopped selling direct feeds of its news to high-speed traders.

Reports suggest that Buffet himself stepped into end the practice, which some had criticised for giving HFT firms an unfair advantage over other investors.

The move is the latest in a string of curbs to firms looking to get an information advantage by paying for premium feeds. In July last year, Thomson Reuters suspended a service that provided subscribers with University of Michigan consumer survey data five minutes before they were made available to the wider market. For some traders that paid several thousand dollars per month, this was made available an additional two seconds earlier.

Thomson Reuters was rapped by the New York Attorney General, which is now investigating the practice for providing an unfair advantage to some traders.

While Business Wire hasn’t yet received attention from the arm of the law, and indeed does not have the same kind of information exclusivity as Thomson Reuters has with the University of Michigan, Buffet was reportedly concerned with the reputational damage it was incurring by continuing to offer the service.

However, Buffet’s decision left me thinking about what can really be considered “unfair” and why some examples of unfairness in the market are met with ire whilst others are considered to simply be part of a healthy competitive market.

There have always been disparities in the capabilities of market participants. The most obvious is the gulf between institutional and retail investors. Asset managers, hedge funds and HFT firms have the resources to access the market in a way that most retail investors can only dream of. From services like Liquidnet, dark pools and sophisticated algorithms, they have a distinct advantage that is inevitable given the kind of money they have at their disposal.

All industries are affected by economies of scale, but this doesn’t mean that smaller players with less capital at their disposal cannot thrive.

Among asset managers, while large businesses can potentially afford to pay to have all of the tools and data that HFT has at its disposal, it doesn’t mean the smaller boutique fund managers have nothing to offer.

Indeed, asset managers that could use HFT techniques don’t, because it’s not part of their investment style and strategy, yet they still reap returns for their investors.

While for one investor, having access to information quickly, such as from Business Wire’s direct feed, is critical to successfully executing their strategy, another who takes a long-term view simply doesn’t need a feed of this type and thus doesn’t pay for it.

The problem with saying that a particular practice is unfair, is that many other similar services that have become widely relied upon are then also up for scrutiny.

Should any firm be able to sell market data? Is it unfair if one asset manager has in-house analysts and another doesn’t? Does having nano-second market access instead of micro-seconds mean you’ve got a major edge over the rest of the market?

Different strategies require different supporting services to make them work, and investors prioritise their spending based on what compliments their strategy. While an HFT firm needs rapid feeds to make their trading profitable, a boutique manager is relying on their in-depth knowledge of a sector and good stock picking. Each strategy has its pros and cons, and to deny one because of a perception it is unfair seems to miss the point.

No doubt there will be further curbs to HFT firms’ ability to access information as quickly as they do now, but it seems that if a firm is able and willing to pay to get ahead, then that’s simply part of a well-functioning and competitive market.