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The loneliness of the high frequency trader

Interesting, if brief, talk about ‘How are firms can capitalising on high frequency trading?' at the FIX Protocol quarterly meeting last night.

The panel (whom I can't quote unless I jump through some ‘media training-inspired' hoops, so I won't bother) spend the first part of the discussion trying to define exactly what High Frequency Trading is? The term ‘electronic market maker' was used to put HFT in perspective. I wonder if there would be as much regulatory bru-ha-ha if our speedy traders were re-dubbed ‘electronic market makers' instead of relishing their boy racer-inspired moniker?

Regulators dealing with technology is a touchy subject. Much has been made around whether regulators have the means and the resources to monitor markets that rely on ever changing and sophisticated technology. One comment put forth the question: Should regulators regulate technology or the market practice around technology?

After all it was an un-intended consequence of Reg-NMS that resulted in the wonderful ‘flash-trading'. Were the roots of that practice in market structure or technology?

While high frequency traders are getting a lot of shtick lately, this panel came to praise and not to bury. It can be said that the equity markets have remained (at least) liquid during the worst of the financial crisis. This was credited with the high population of high frequency traders operating in the equity markets. There has also been some Twitter talk about #HFT which says that post regulatory market structure is optimised for high frequency trading - to remove the HFTs would be to introduce unwanted volatility.

Judging from how much various exchanges have invested in high quality data centres (Nyse Euronext in Basildon-mentioned last night) most exchange venues are betting that HFTs will be around the markets for some time.

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Comments: (2)

A Finextra member
A Finextra member 13 October, 2009, 21:31Be the first to give this comment the thumbs up 0 likes

re: the unintended consequences of Reg NMS  -

Whilst attending FIX Protocol meetings on Reg NMS, it was always a hot topic to discuss the exact meaning of the regulations as written.

The actual regulation stated that all orders must be displayed within "one second."  We used to question, was this a rolling second, a dutch auction second, was it only accurate to 500 milliseconds, or 50, etc etc???

Among all the other questions about Reg NMS, this was quickly sent to the back of the pack and roundly ignored as the implementation date arrived.  Very funny to see it come back as flash trading.

Personally, our take was always that this was caused by regulators not really understanding the technology, and therefore not understanding the implications of implementing regulatory specifications technically.  That "second" looked like a giant technical loophole, and in fact proved to be so.

A Finextra member
A Finextra member 14 October, 2009, 23:41Be the first to give this comment the thumbs up 0 likes

Regulators are at a loss whether to value HFTs above or below the line of acceptance.  It also wouldn't surprise anyone to know that regulators have both feet firmly placed in the camp of acceptance today - on the grounds that it is too difficult to argue a case and then much too political to make any regulatory change.  

From one investor's perspective the evidence is apparent in all trading logs that HF micro trading easily gets out of hand and moves the price in a direction that supports held positions, even 'colluded between dealers' dare I say.  For that reason alone there has to be much greater transparency although woe betide the regulators if they should ever look like creating a level playing field for all investors!