HFT and Liquidity

Terry Flanagan

Despite the controversy surrounding the merits of high frequency trading, some market participants say it provides much needed liquidity.

The effects of high frequency trading on the marketplace remains a hot button topic for market participants, with proponents on both sides of the fence.

“Market makers are high frequency traders,” said James Boyle, executive director at UBS during the FIA/OIC Equity Options Conference. “What a liquidity provider brings to the table in normal market conditions is liquidity, and most liquidity is good liquidity,” Boyle added.

“With the entrance of high frequency trading into options, it provides liquidity, which is positive for the markets,” said Martin Mannion, chief operative officer of execution services at Citadel. “Options in general outside of very the liquid products are very different from equities.”

Boyle asserted that there was an unwarranted negative light cast on the firms that practice high frequency 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.

“We need to figure out an appropriate way to reward them for taking risk, especially in high volatility times,” added Boyle.

Another panelist emphasized that it is in part because of the high frequency traders that retail customers can come in and have their orders filled, often without much delay.

“The retail customer is typically the liquidity taker,” said David Fisher, chief executive officer of OptionsXpress. “But because of the deep liquidity in the markets, customers are confident they can get out when they want.

“What’s important is whether high frequency trading is adding and providing liquidity, even when the market is volatile. If they are adding liquidity in a deep and consistent basis, how fast they trade is irrelevant,” said Fisher.

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