08.01.2013
By Terry Flanagan

Perceptions on High-Speed Trading Vary

Differing views of high-frequency trading persist across the markets, ranging from outright antipathy to acceptance.

Institutional traders, and trading venues that cater to them, tend to express the strongest anti-HFT sentiments.

“Institutional investors are concerned about predatory high-frequency traders who track sell and buy orders and take advantage of this information to trade ahead of them,” said John Kelly, chief operating officer at Liquidnet. “This type of trading hinders the institutional investors’ ability to execute any long-term investment decisions and so they seek safe havens which restrict this type of interaction.”

John Kelly, Liquidnet

John Kelly, Liquidnet

Kelly added: “As most high-frequency trading activity runs counter to the interests of our members, long-only fundamental institutional investors, we made a conscious decision to exclude it from our natural pool, creating an HFT-free trading environment – one that safeguards choice and trade performance for the benefit of the end investors.”

Others take a more benign view, saying that HFT brings benefits associated with automated trading, such as more liquidity and tighter bid/ask spreads.

“If a trader considers HFT volume to be toxic then they are likely to be more active in the asset classes and products where HFT activity is lighter,” said Travis Felker, vice president of research & development at trading system provider Embium. “However, we have found that there are a healthy proportion of traders who believe HFT activity is generally not toxic, especially for those with time horizons longer than a few seconds.”

This view is shared by most exchanges, many of which have forged close ties with HFT market-making firms.

For example, the NYSE Designated Market Maker (DMM) combines high-tech automation for low latency and anonymity with high-touch participation by market professionals for orderly opens and closes, lower volatility, deeper liquidity and price improvement opportunities throughout the trading day.

DMMs have true obligations to maintain a fair and orderly market in their stocks, quote at the NBBO a specified percentage of the time, and facilitate price discovery throughout the day as well as at the open, close and in periods of significant imbalances and high volatility.

“Every party requires a counterparty, whether it is adding or removing liquidity, each order that is placed is providing a service,” said Felker. “Many market participants recognize how often their trades are fulfilled by high speed programs, and ultimately find value in that contribution.”

Liquidnet, which has long advocated that asset managers should have choices as to where they trade, has taken a positive view of the proposed Aequitas exchange in Canada, which has the stated goal of restricting what it calls predatory and opportunistic trading strategies while challenging the dominant make-take fee model.

“At Liquidnet, it was essential that we gave institutional investors a venue free of HFT globally,” said Kelly. “We understand that Aequitas will use an approach similar to the one we pioneered in Canada, but with a different model that utilizes market makers. It’s early days for Aequitas but it does provide choice in the market -– and so we’re supportive.”

Stock exchanges have long been at the center of capital creation, price discovery and equity trading in their local markets but in recent years they have increased their focus on high-frequency traders which has proven profitable for them.

“Many HFT strategies look to large institutional orders for valuable information on market imbalances, and as a result, long term institutional investors and anyone who invests in a mutual or pension fund is now at a disadvantage,” Kelly said. “What we have seen is that it is difficult for one venue to satisfy the needs of all traders, and while not all high frequency trading is bad for the market, institutional investors need a choice about whether or not they want to engage with this type of trading.”

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