11.04.2011
By Terry Flanagan

Misunderstanding of HFT

Market participants assert that there are many misunderstandings and misconceptions of the effects of high-frequency trading in the marketplace.

Although it has been around in the markets now for several years, high-frequency trading is still very much a hot topic, with supporters of the practice often noting that many still misconstrue its merits.

“All high-frequency trading does is use what’s available to them,” said Paul Daley, senior managing director of Fox River Executions, a SunGard company, during the FPL Americas Trading Conference. “The regulators laid out the structure, and the high-frequency traders are using it.”

Observers often note the irony, in that it was the advent of regulation, such as Regulation NMS and Regulation ATS, that gave rise to the high-frequency form of proprietary trading. Having 13 equities exchanges and well over 40 alternative trading systems has allowed these firms to arbitrage any price disparities between venues. In addition, the proliferation of maker-taker pricing, which gives rebates to liquidity providers, has allowed HFTs to further thrive.

Despite the proliferation of high-frequency trading, market participants believe that they have a marginal effect on the markets, and that it is often the scapegoat for any drastic swings in pricing.

“High-frequency trading is very much a reactionary thing,” said Daley. “It reacts to volatility in the marketplace. Not to say it doesn’t exacerbate or calm volatility. The driver today is not high-frequency trading. “It’s Greece, it’s the European debt situation. That’s driving the volatility.”

Fox River is an agency brokerage that was acquired by SunGard in July 2010. It is in the process of applying to Finra to merge this unit with its other broker-dealer, Valdi Liquidity Solutions.

The broker-dealer unit of SunGard is a small but significant portion of the company’s overall operations. It makes up about 25 percent of its Global Trading segment, which in turn makes up about one-fifth of SunGard’s Financial Systems group. The Financial Systems unit is the largest division of SunGuard, making up more than half the firm.

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