Market Users Look to Embrace Unstoppable March of Technology
Regulators are being warned that they must significantly up their game to cope with the pace of development of technological innovations in financial markets—while market participants say that potentially slowing down this evolution will either be futile or dangerous.
“In addressing issues of systemic risk and financial stability, it is particularly important for regulators to develop and maintain the capacity to analyze extremely large data-sets,” said the recent Foresight Report, a much-anticipated two-year study commissioned by the U.K. government that looked into the effects of high-frequency trading on markets.
And with new developments in computer technology only likely to amplify this problem further, it is going to be even harder for regulators to keep abreast of market developments in the future.
“The challenge of dealing with ‘big data’ is already severe enough for any single major financial trading venue,” said the Foresight Report.
“For regulators, the issue is made even more difficult as they are required to deal with aggregate market data generated simultaneously by multiple trading venues, as part of their regulatory role to oversee fair and orderly market systems, to identify policy violations and to monitor the need for policy revisions.”
And this build-up of market data is already causing some concerns over the orderly functioning of today’s markets.
“A lot of volume in the market sometimes makes problems on the technology side and creates some risks,” Gherardo Lenti Capoduri, head of market hub at Banca IMI, an Italian investment bank, told Markets Media’s European Trading Investing Summit in London on October 11.
However, many in the industry are more fearful of the stifling new rules that are likely to hit financial markets in the coming months and years.
Politicians on both sides of the Atlantic are beginning to formulate ideas to severely curtail the growing practice of HFT, which now accounts for over 60% of all U.S. daily equity volumes, as they believe it is at the heart of many of this year’s trading snafus, such as the botched IPOs of Facebook and Bats Global Markets and the erroneous trades made by Knight Capital.
In Europe, for instance, plans are afoot to introduce a minimum resting time for orders to remain valid on an exchange for at least 500 milliseconds. This rule, if implemented, would likely slow the progress of technology in financial markets and market users are also worried about the unintended consequences that may come from some of these ill thought-out rules.
“Once the rules are put in place, especially the 500 millisecond rule, it will just create the same thing but slower,” Michael Horan, director and head of trading services at Pershing, part of custody bank BNY Mellon’s empire, told the Markets Media conference. “It will not solve anything, we need to be very careful.”
Michael Krogmann, executive vice-president of Deutsche Börse, operator of the Frankfurt Stock Exchange, concurred: “HFT is just enabled by technology. It’s just a strategy and normal development of technology being implemented in financial markets.”
And market users say that this rise in technology may not even be able to be contained anyway and should be embraced.
”It is not possible or beneficial to stall the advent in technology,” Kee-Meng Tan, managing director and head of agency broker Knight Capital’s trading group in Europe, told Markets Media.
“There will be issues and snafus. The important thing is to take all steps to minimize risk, be it systemic or operational. Regulators and legislators should only step in where market practice has demonstrably failed.”
And while tomorrow’s trading desks may be stocked less with humans and more with computers—the Foresight Report remarked that “we humans are made from hardware that is just too ‘bandwidth-limited’, and too slow, to compete with new developments in computer technology”—this may not necessarily be a bad thing.
“Technology has only ever made finance safer, with very few exceptions,” Jock Percy, chief executive of Perseus Telecom, a provider of trading connectivity, told Markets Media.
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.
The MOU covers certain security-based swap dealers and participants.
Equity underwriting on European exchanges rose 70% in the first half.
The analysis is based on transactions publicly reported by 30 European APAs and venues.
A similar service is available on the BIDS platform in the US equity market.