by Adil Siddiqui, Independent Financial Services professional.
UK Treasury: ‘Tell me about yourself HFT’. Where shall I start, I’m big, I’m bad and I’m ugly, no sorry I’m invisible!
High frequency trading (HFT) has been the recent driver of liquidity and reducer of trading cost in on exchange futures and equities markets.
However with the Dow having an erratic move on May 6th the SEC have investigated what caused the flash crash and are looking to clamp down on market abusers.
It seems that HFT has drawn considerable attention. On the one hand traders, executing venues and institutional investors welcome the introduction of this beastly simple buy and sell executor that is driving volumes and tightening spreads. On the other hand the market is worrying about the affects this can have especially where large moves can wipe out positions and un-favour ‘slower’ traders.
High frequency trading accounts for around 60% of volumes on exchanges and MTF’s in US and around half that amount in UK/ Europe.
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The danger is where high frequency traders can exercise their strategies extremely quickly (nanoseconds) without an objecting viewpoint. This means that if the HFT strategies are one side directional then markets can move considerably before other participants can enter or exit their trades.
In addition HFT operators can propose computerised front running which can exploit markets further.
The regulators have been examining this especially since the Nanex report outlined issues the market can face in light of the May 6th fiasco. With the UK economy still in a dire state they don’t want any further hiccups from. The treasury along with the EU commission is investigated the impacts of HFT and the future developments.
HF T represents the natural growth of the market and most market participants welcome it as long as there is regulation and protection for users.
Maria Velentza a senior EU commissioner nicely summed up: we don’t want to ban (high frequency trading), we shouldn’t demonise technology, but we should look to improve ways to prevent market abuse’.
HFT in FX is a new phenomenon and is shadowing the equities and future inflow. A report by Aite group shows that High Frequency in FX will reach an incredible 40 by the end of 2012. This coupled with the recent BIS survey shows that FX is still proving itself to be an asset class the entire market appreciates.