Tell me about yourself High Frequency Trading (HFT)
by Adil Siddiqui, Independent Financial Services professional. UK Treasury: ‘Tell me about yourself HFT’. Where shall I start, I’m big, I’m
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.
Great explanation about HFT thanks GENIUS
I agree with the author – Adil, that HFT should not be banned but measures should be taken to protect the users perhaps through some regulation or through some enhanced technology for the exchanges. Typically, retail traders don’t have access to these “black boxes” and are unable to implement and execute these sophisticated strategies. The May 6 flash crash of the DOW was just one scenario but something similar could happen again as markets continue to work under extreme trading conditions.
i just want limit to be place on high frequency trading to protect the portfolio of retail traders to avoid a repeat of may 6th
Limts, I dont think you will get them isy. FX is already quite liquid and costs or always coming down. there is a two tier process where the institutions trade and then after the retailers trade. in fx i can only see banks putting their own caps on delaying or squeezing liquidity.
Very interesting. Heard so much about HFT but wasn’t quite sure about the dangers of using it, until I read this article.
hi sir,
i m just curious abt how sucessful wil HFT be in forex, cause there is no centralized exchange here.
thanks for the post