02.23.2012
By Terry Flanagan

FIXing HFT

Some buy-side traders have been long complaining about HFT’s alleged unfair advantages, but others feel industry standards are leveling for the two players.

This March, the not-for-profit Financial Information Exchange (FIX) Protocol Limited is expected to release an updated set of standards for high frequency traders to boost apples-to-apples latency across the HFT space, and more broadly, across all capital markets participants. FIX is the de-facto messaging standard for trade communication within the global equity markets, and is maintained by member firms across the buy and sell side.

Although talks of setting an industry standard have been ongoing for most of 2011, protests from sell-side participants, such as exchanges, have kept from finalizing them mainly because of their concern that the rule would draw attention to differences in execution speed.

The spectrum of speeds for execution, which is currently not transparent among buy-side players, is wide-ranging. A new set of rules may toot the horn of those who are the fastest, generally HFT, against their slower buy-side counterparts.

“Within the last three or four years, it’s gotten very competitive even within the HFT space as many more people are trying co-locating their servers to ramp up speeds,” said Chris Bartlett, director of automated and quantitative strategies’ firm, Nobilis Capital. “People like to blame HFT for being front-running, with better accessing to the book, but everyone needs low latency and higher speeds these days.”

As the HFT space becomes more crowded, and as FIX attempts to level the playing field across participants, practitioners are planning on moving across regions and asset classes.

“Across geographies, there’ll been expansion in Brazil, India, Asia Pac (Malaysia, South Korea), and China—in that order,” said Mark Palchak, header trader for Chicago-based Infinium Capital Management. “The emerging markets though, pose their own challenges as HFT hardware can be really hard to get.”

The high-frequency, low-latency strategy is moving across asset classes too, into the liquid aspects of fixed income and foreign exchange.

“Equity and equity options are a mature market for HFT,” Palchak said. “There are opportunities within swap executions, and foreign exchange…except that can be hard for firms that have bi-lateral agreements with banks as flows tend to be taken (from the banks).”

As HFT moves, so may the forces that keep the capital markets in check, as exemplified by FIX Protocol widening its mandate across multiple latency players. Since inception in 1992, the FIX protocol has been designed to bring a greater level of transparency and address regulatory concerns over the growth in algorithmic trading.

Transaction cost analysis (TCA), a tool used by equity traders to analyze trading efficiency and cost, is also becoming popular among FX buy-side traders—a coincidental trend taking shape as HFT moves into the FX space.

HFT will be the slowest to adapt commodities, which still have illiquid properties, across to Palchak.

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