Regulations Result in Changing Market Conditions – HFT and MIFID II

High frequency trading has been a buzz word stinging the financial markets since programme trading began to take precedence over

High frequency trading has been a buzz word stinging the financial markets since programme trading began to take precedence over the human touch. Technological enhancements over the last 40 years have meant that the markets are becoming more developed as a logical and systematic framework is behind them.

stephane
Stephan Leroy
Head of Sales & Marketing
QuantHouse S&P Capital IQ

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There are those who are for or against this new development, however, as the markets evolve we learn more about the pros and cons of electronic trading. Undoubtedly computer or programme trading has had its fair share of coverage for more bad reasons than good over the last two years. This has come to the attention of the regulators, who are exploring this phenomena and looking at ways to manage high frequency trading (HFT) in the modern trading environment.

MIFID II is a follow up from the inter-Europe financial markets directive that was implemented in 2007. MIFID covers specific aspects relating to HFT. Let’s explore.

What Exactly is High Frequency Trading?

High frequency trading is defined as a program trading platform that uses powerful computers to transact a large number of orders at very high speeds. High-frequency trading uses complex algorithms to analyse multiple markets and execute orders based on market conditions.

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Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. (source: Investopedia)

HFT in Action

Electronic trading has come under scrutiny globally after the practice was blamed for a May 2010 incident that saw the Dow Jones Industrial Average briefly lose almost 1,000 points in less than 20 minutes. An algorithm malfunction on Aug 1 cost Knight Capital Group $440 million, driving the company to the brink of bankruptcy.

Should HFT take the blame for the above? The SEC conducted a detailed examination of what caused the flash crash, and yes there is some blame that can be attributed to the way one particular firm was placing orders, however it is unfair to give high frequency trading the lion’s share of the blame.

Stephane Leroy, Head of Sales & Marketing at QuantHouse S&P Capital IQ simply believes in strong measures to truly understand HFT, he says “risk management technologies are here for that” when looking at preventing another flash crash.

This is an excerpt from a detailed report on MiFID and HFT in the Forex Magnates Industry Report for Q4 2012

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