According to The Economist algorithmic trading and high-frequency trading (HFT), virtually unknown until about six years ago, now account for almost 70% of the flow of orders on the main exchanges. Since the introduction of electronic trading there has always been more advanced solutions breaking through to help traders gain a competitive advantage. In today’s fast paced environment, however, HFT has the speedy edge. Can we level the playing field for traders working manually?

Regulators have always tried to create a fair market where all participants play by the same rules, but with each breakthrough in trading capabilities, the rules have to evolve in order to protect investors and the markets. HFT is a prime example of a trading activity benefiting from fantastic progress in IT capabilities and business knowledge but in need of policing.   

Advancing technology enables us to have a more complete view on trades and what is happening in the market but today the focus is very much on reacting to a problem rather than preventing it. There is certainly scope to put safeguards in place. The role of the regulator is key to ensuring that each market participant is accountable for its investment decisions in both manual trading and automated activity. Fines imposed must remind every firm that not adhering will have significant financial impact.

For regulators it’s hard to point out a specific trader at fault especially when you have a server sending messages to the market rather than a human. In addition, exotic products make it extremely hard to monitor in real-time due to complexity of the orders. Technology can help with this but if you compare regulators’ IT budgets to those of FX or interdealer broker firms, they do not range on the same scale. Globalisation is also a challenge; whilst providing fantastic opportunities for companies looking for investors, regulators, most of which are regional, have difficulties in monitoring cross-border.

Perhaps financial institutions need to take it upon themselves to monitor trader activity more closely. Electronic trading offers an audit trail via its automated nature, but for trades made by voice the waters are less clear. There have been huge leaps in technology capabilities to capture and record voice trading communications such as mobile phones, email and instant messaging. These records can be reconciled against full audit trails of orders and trades to help monitor the markets. Here technology is an enabler for organisations and the regulators.

Will the level playing field goal ever be realised? With the fast paced nature of HFT beating manual traders on the speed front every time, it remains to be seen.