HFT? What’s the fuss?
Are jibes against high frequency traders simply sour grapes by industry laggards?
With some estimates putting high frequency equity trades at close to 70 percent of the market, the storm surrounding the low latency practice shows few signs of abating. As charges of unfair practice abound, FPL asked a panel of London-based experts for their thoughts on the good, bad and the ugly of high frequency trading.
18 months ago the acronym HFT – or high frequency trading – barely registered outside the hardcore of the financial community. Today, the HFT community is being blamed for many of the investing world ailments. To try and sort the hyperbole from the fact, FIXGlobal highlights some of the key points made by those in the know about how firms are reacting to the threat or opportunities presented by HFT firms.
What is it?
Despite the level of expertise across the industry, agreement on what constitutes high frequency trading is hard to reach. To some it is a question of degree. Who in the market isn’t interested in latency? All sorts of algorithmic traders are latency sensitive, but not necessarily HF. Perhaps the cut-off point is when a high frequency trader became an automatic market maker, providing continuous two-sided bid offers.
Adding to the definition, HF traders seem characterised by an obsession with latency (down to the microsecond level); the ability to mix both statistical techniques as well as rapid-fire twoway market making; and also to end up flat at the end of the day.
Finally, it seems most agree that confidentiality was a hallmark of HF traders, with one of the experts in the room commenting, “You can define the HFTs as the ones not in the room right now.”
Is it anything new?
Market makers have always been around, albeit that the technologies have changed. High Frequency Low Latency (HFLL) has been around for more than 20 years, but people are scrutinising it – and other aspects of the market – now because of the extreme market volatility we’re going through. In particular, experts agree that those who had not upgraded their own trading practices fast enough were the main critics of high frequency trades.
How fair is it?
The critics argue that HFT firms have unfair access to execution venues and could front-run slower traders. Concerns over flash orders and unfettered sponsored access or “naked access” have prompted regulators in the US to review these strategies, but any changes could risk making a dramatic impact on a major source of liquidity.
Though, there exists a school of thought that HF traders have an advantage and manipulatory intentions, the consensus appears to be that it is the technology and not the traders that are creating the advantage. Better hardware, better networks and better software – it all gives you a better trading strategy. But these advantages are open to all, providing you have the interest and very deep pockets.
