High-frequency trading (HFT) has been lauded for improving share markets and lowering costs for the investment community. However, it has also been accused of contributing to volatility in the market and a negative impact on the value of listed companies. According to reports, regulators around the world are looking at electronic traders.
Improved transparencyWriting for
Bloomberg, Yuko Takeo and Toshiro Hasegawa say calls for improved transparency in the HFT world are increasing in Japan, where the country’s Financial Services Agency is carrying out an in-depth analysis of super-fast traders.
70%
of orders went through co-location services used by HFTs in 2015
The report highlights Osaka Exchange’s Chief Executive Hiromi Yamaji’s calls for a registration system that notifies authorities about high-frequency strategies. He says:“We need a system to help us understand in order to increase transparency in the market, in a way that’s in line with global regulations.”
The report continues: “The Securities and Exchange Surveillance Commission sent a survey to market participants earlier this year that asked about the services brokerages provide to HFT firms.”
It found that in 2015, nearly 70% of orders and about 40% of settled cash trades went through the co-location services primarily used by HFT.
Bloomberg article
Predatory worldOn news website
The Conversation, Professor of Computer Science and Engineering, Michael Wellman, compares the advent of HFT to scenes from action movie Jurassic World in which “fast, agile predators pursue their slower, less nimble prey, as the latter flee for safer pastures”.
Professor Wellman writes that the unprecedented speed of HFT makes it unpredictable, while any relative delay can mean no trade and no profit, leading to a “latency arms race” in which the designers of trading algorithms adopt any possible method to reduce response time. He suggests neutralising these speed advantages by changing “the way markets time the matching of buy and sell orders”.
‘Today’s typical market works by matching orders to buy and sell a stock or other asset on a continuous basis,” says Professor Wellman. “For example, when a trader submits a request to buy a share of Apple at a specific price, the exchange matches it immediately if there is an offer from someone else to sell at the same price or less. This immediacy is what allows a trader able to react more swiftly to new information to profit off of slower rivals.”
He says that in a frequent call market, orders to buy and sell are matched at fixed intervals, so a buyer can’t beat rivals as an order wouldn’t transact immediately, giving others a chance to ‘catch up’.
“By ensuring that speed no longer categorically prevails, the incentive for shaving milliseconds and microseconds [off] is virtually eliminated. Orders within the interval compete instead based on price, leading to a more efficient overall set of trades.”
However, he says, no stock exchange operates as a fully-fledged frequent call market as the view is that faster is always better.
The Conversation article
Wall Street threatMeanwhile, in the US, democrats have backed a proposed trading tax on exchanges in an attempt to curb HFT, Joe Parsons writes for
The Trade.
In its draft platform document, the party calls for a tax on Wall Street to “curb excessive speculation and high-frequency trading, which has threatened financial markets".
The proposal has been backed by presidential candidate Hilary Clinton, and regulators have sought to introduce the same, but have received industry-wide criticism amid fears that a tax would dramatically sap liquidity from electronic markets.
The Trade article
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