12.24.2012
By Terry Flanagan

Buy Side Remains Skeptical Towards HFT

An uneasy standoff continues between a large slice of the buy side and the practice of high-speed trading.

Jason Rolf, fund manager, Amati Global Investors

Jason Rolf, fund manager, Amati Global Investors

“A lot of media attention is currently focused on HFT and whether it genuinely performs an important job, or is just an accident waiting to happen,” Jason Rolf, a fund manager at Amati Global Investors, a U.K.-based investment manager, told Markets Media.

High-frequency trading is often credited with increasing liquidity and the lowering of spreads, but many institutional buy-side traders say that they end up paying more for stocks and earn less on sales due to the growing presence of HFT in today’s marketplace.

Not all HFT is viewed as harmful, though, with high-frequency market making, which allows firms to enter into and exit positions, seen in many quarters as beneficial. It is the other type of HFT, which uses tactics and algorithms to basically ‘game’ the market and beat slower-moving traders to the punch, that causes much angst to many on the buy side.

HFT is now thought to account for around 60% of all trades on U.S. equity markets and up to 40% on European markets, but regulators on both sides of the Atlantic are beginning to take a closer look at the practice following a series of trading glitches in the past few years, notably the 2010 ‘flash crash’ as well as this year’s botched IPOs of Facebook and Bats Global Markets and the Knight Capital trading disaster, which have all shook investor confidence.

The European Union is the furthest down the road at present with regulatory measures, with the introduction in May of detailed guidelines through the European Securities and Markets Authority, the pan-European regulator, to better monitor algorithmic trading practices. And the latest version of the MiFID II regulatory update, which is expected to be due out in 2014, has a raft of measures in it to slow down HFT such as the 500 millisecond minimum resting times for orders, order-to-trade ratios, ‘circuit breakers’ to suspend trading on exchanges if necessary and order cancellation charges.

“HFT certainly requires at least some oversight; in it’s most basic form HFT is being at the front of the queue on the bid/ask spread and that requires having the fastest access to the market,” said Rolf.

“But the purpose of the stock market is the efficient allocation of capital to business via trading of their stock. What purpose is HFT providing to these market mechanisms at ever higher speeds?

“Trading speeds have increased exponentially over the last few years. Questions remain over how much control anyone has over these algorithms, least of all the people using them. But HFT does have a good side, by adding liquidity and efficient price discovery.”

However, others in the market caution against increasing the regulatory oversight on HFT, especially in the current climate of low volumes.

“You can’t legislate against technology,” Michael Horan, director and head of trading services at Pershing, part of custody bank BNY Mellon’s empire, told Markets Media.

“You can’t put barriers up against firms who have better systems than another. The 500 millisecond issue; all you are going to do is change the speed HFT operates. They will do the same thing, but only slower. Regulators have a job to do, and it has to be done but they have to be careful the decisions they make in the current climate. You have to regulate markets that make them stable but not to the point that discourages liquidity.”

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