European Prop Traders Debunk Myths of HFT

Terry Flanagan

Two years on from the May 2010 ‘flash crash’ on Wall Street, in which high-frequency traders were blamed for exacerbating the situation, and politicians and regulators across the pond in Europe are continuing to grapple with ways to curtail the practice.

However, one Brussels-based proprietary trading lobby group says that there are a host of misconceptions surrounding high-frequency trading that need to be cleared up.

“It’s time to bring more balance to the HFT debate, which until now has been driven by emotive language, anecdotes and fabrications rather than hard fact,” said Remco Lenterman, chairman of FIA EPTA, who is also managing director of Dutch high-frequency trading firm IMC.

Lenterman says that critics of HFT chose to overlook the value that principal trading firms add to the real economy in terms of lower transaction costs and greater liquidity.

FIA EPTA, which represents firms that trade their own capital in European exchange-traded markets such as Knight Capital, Optiver, Citadel Securities and Quantlab Financial, estimates that its members are responsible for a substantial part of the traded volumes on European exchanges and multilateral trading facilities.

Meanwhile, another European lobby group called Finance Watch—which is made up of consumer groups, retail investor associations, trade unions, think tanks, NGOs and others—continues to take the fight to the HFT community.

“We support technological developments that improve market effectiveness, i.e. the ability of markets to serve the real economy and society as a whole,” said Benoît Lallemand, senior analyst at Finance Watch.

“But there is a world of difference between ‘useful’ buy-side algorithmic trading and predatory HF trading; for example detecting a buy-side algorithm and using a speed advantage to degrade the buy side’s aggregate price execution. HFT profits made in this way come at the expense of pension savers.

“HFT brings trading volume to markets but very little executable liquidity, as quotes rest for milliseconds only in the order book and cancellation rates are extremely high. This makes for an illusion of liquidity: it appears but cannot be utilized.”

There is also a school of thought that believes market forces should be left to their own devices and politicians and regulators should just take a back seat over HFT.

“Whilst different definitions abound, electronic market making has just as much right to exist as any other business model in today’s trading ecosystem,” said Steve Grob, director of group strategy at Fidessa in London, a trading and technology company. “If you don’t want to trade with them, then the answer’s simple–don’t!”

Markus Ferber, a German member of the European parliament who is responsible for guiding the revised version of the Markets in Financial Instruments Directive (MiFID II) through to the next stage of approval in Europe, the regulation under which HFT is covered, wants to introduce rules that will, to all intents and purposes, scupper most current HFT practices.

The German MEP continues to adopt a tough stance on algorithmic trading—despite opposition from some other MEPs—and says that all venues should have meaningful circuit breakers in place, penalties for excessive order cancellations and that all orders should be valid for at least 500 milliseconds.

The U.S. ‘flash crash’ of May 6, 2010 occurred when the Dow Jones Industrial Average index plunged 1,000 points, almost 9%, only to recover within minutes. Several theories have been put forward for the incident, but regulators have admitted that aggressive selling by HFT firms in the immediate aftermath exacerbated the falls.

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