Caution on New Regs

Terry Flanagan

With the controversy surrounding the effects of high frequency trading, some market participants warn that caution should be taken on any potential new regulation governing the practice.

The effects of high frequency trading on the marketplace remains a hot button topic for market participants, with many proponents voicing their support for the practice.

“If you take away high frequency trading, you will have even more market fluctuations and uncertainty,” said Thomas Guinan, chief technology officer of Advantage Futures during the FIA Expo in Chicago. “They provide liquidity when others won’t do so. They provide a lot. Regulation will reduce or redirect liquidity and make the markets less efficient than how they are. I suggest that (regulators) tread slowly, because many don’t understand it.”

“Regulators need to understand how technology has evolved in last 10 years,” said Mayur Kapani, vice president of trading technology at the IntercontinentalExchange. “I don’t think there is anything wrong with high frequency trading in and of itself.”

HFT supporters often assert that there was an unwarranted negative light cast on the firms that practice low-latency trading when it came out that some firms simply shut off their systems when the markets become overly volatile, such as during the ‘flash crash,’ which would further exacerbate the volatility and remove much needed liquidity from the markets.

While there are arguments to be made on both sides for whether or not HFT brings positive or negative effects to the market, exchanges and trading platforms are increasingly embracing high speed traders.

CME Group recently announced that its co-location services, which will include hosting, connectivity and support services, will go live on Jan. 29, 2012. It is one of among many exchanges worldwide looking to increase the speed and lower the latency of their trading platforms, which most directly benefits high frequency traders. Co-location facilities are located as close to their machine engine as possible, giving trading firms, including HFT firms, nearly instant execution times. HFT has grown to about 75 percent of trading volume in the U.S., according to industry estimates.

The service is expected to become a lucrative source of additional revenue for exchange operators, as they capitalize on the quest for speed sought by active, high-volume traders. CME Group had previously said it expects to generate between $30 million and $40 million from co-location services when they launch next year.

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