Peeling away financial reporting issues one layer at a time

High Frequency Trading: What Would Cicero Say?

This post is a little different from my posts on accounting issues.  I’m going to weigh in on the high frequency trading (HFT) brouhaha that was ignited by the recent 60 Minutes report on Michael Lewis’s new book.  

There are a number of ways to make money from HFT, but the most easily understood seems to be a version of “front running.”  A lurker on an electronic exchange waits for the news that a large ‘buy’ order is less than 100% filled; and races ahead to nearby exchanges in order to gobble up the available shares before the buyer’s order arrives.  The result is that the buyer acquirers the shares from the lurker at a slightly higher price than if the lurker had not been lurking.  

Over a few million iterations, a few pennies here and there per share adds up to really big money for the lurker. And hardly anybody has seemed to notice that lots of lurkers have become super rich, until relatively recently. 

There are a number of provocative questions posed by HFT, such as whether it produces anything of value to society, is immoral, is illegal, or should be illegal.  My own modest contribution toward an answer to these questions is to recall a dilemma posed by Cicero circa 50 BC.  Despite its antiquity, he seems to get to the heart of the matter — whether it is OK to trade against another party who has no idea that you know what you know.

My memory may not be perfect in this regard, but I think I first became aware of Cicero’s dilemma from a blurb (i.e., something less than a full-blown article) published in the Journal of Finance perhaps 30 years ago.  I have thus far been unable to retrieve it from any of the online databases to which I have access; but I was able to reconstruct it from this internet source on business ethics: 

A Greek merchant is shipping corn from the mainland to the island of Rhodes, which is experiencing a famine.  When he arrives he is able to ascertain that he is the only person who knows that oodles more corn will be arriving one day hence.

Does the merchant have an obligation to disclose what he knows before negotiating a price for his corn?

Kindly permit these modest observations from a non-philosopher:

  • A fundamental question is whether business ethics should be seen as distinct from other societal norms. 
  • Another fundamental question is whether information should be seen as a commodity like any other; or as a commodity like no other.  If the latter, then perhaps the market for information should be regulated in unique ways.
  • Apropos to the forgoing, we do have laws that would require the Greek merchant to disclose what he knows before transacting in certain analogous situations.  See sections 16 and 10(b) of the Securities Exchange Act of 1934.

Discuss amongst yourselves. 



  1. Reply John Hepp May 14, 2014

    Galileo’s early use of the telescope to spot incoming ships, identify the cargo, and tip off traders in commodity markets is a closer analogy. The story goes that he was awarded an income and university chair by grateful merchants. Was that unethical or just a better use of technology?

  2. Reply Pearl Mkhize October 12, 2014

    As the blog Accounting Onion is primarily an accounting related blog, an explanation of the term ‘high frequency trading’ would add more understanding to the topic. The analogy of the Greek merchant was helpful in understanding the concept and forming an opinion thereof. Evaluation of the suggested act, sections 16 and 10(b) of the Securities Exchange Act of 1934, would probably further provide an analysis of the abovementioned analogy. My personal view on the topic is that, high frequency trading should not be viewed as unethical, or illegal and should not be made illegal. Although there is not any clear evidence that high frequency trading has added to society and although it is secretive and mysterious, it is not at all evil or unethical. High frequency trading does contribute towards the economic market as it adds value to the stock market in that it makes it more efficient and has a great impact on small investors. Therefore, high frequency trading is beneficial and should not be viewed as unethical.

Leave a Comment