09.12.2011
By Terry Flanagan

U.K. Study Predicts Expanded Role for HFT

Computer-generated algos could supplant those created by humans.

High-frequency trading is receiving greater scrutiny from regulators and government, stirring up what was already a contentious debate about its impact on financial markets.

A long-awaited study sponsored by the government of the United Kingdom has concluded that HFT is the wave of the future.

Present-day robot computer trading systems are capable of performing jobs that no human trader could ever do, according to the study, such as assimilating and integrating vast quantities of data and making multiple accurate trading decisions on split-second time-scales.

The paces of development or technology innovations in the financial markets, and the speed of their adoption, are likely to increase in the future.

“Computer-designed and computer-optimized robot traders are likely to be increasingly viewed as routine, and in time could potentially come to replace current algorithms designed and refined by humans,” the report said.

Although the study found no direct evidence that HFT has increased volatility, in specific circumstances, a key type of mechanism can lead to significant instability in financial markets: self-reinforcing feedback loops (The effect of a small change looping back on itself and triggering a bigger change, which again loops back and so on) can amplify integral reeks and lead to undesired interactions and outcomes.

“While the report suggests that there is no link between responsibly-practiced HFT and market volatility, the extremes of volatility we have seen recently must be accelerated by HFT,” John Bates, chief technology officer at Progress Software, told Markets Media.

Trading firms and regulators still largely have inadequate cross-market oversight in place to detect and respond to market abuse and market anomalies before it’s too late, which remains a tremendous threat to the stability of the markets, said Bates.

“Firms that actively deploy HFT must not mistake this study for a validation that the practice cannot impact the market negatively. However, with proper monitoring and risk controls in place, along with real-time policing by regulators, high frequency traders can be a beneficial component of the financial ecosystem,” he said.

Progress provides market surveillance and monitoring technology designed to provide insight into trade order flow and more control over investigations of abuse and operational incidents. The system enables trading venues and brokers to rapidly modify real-time abuse detection scenarios, so that they can keep abreast of regulatory changes, such as those required by the Dodd–Frank Wall Street Reform and Consumer Protection Act in the U.S. or the Markets in Financial Instruments Directive (MiFID).

The UK government late last year commissioned the study, known as the Foresight project, into the impact of high frequency trading on market stability and the UK economy.

The Foresight project, sponsored by HM Treasury and led by the Government’s chief scientific adviser, Professor Sir John Beddington, explores how computer generated trading in financial markets might evolve over the next decade or more, and how this will affect financial stability and the integrity of financial markets, including price information and liquidity.

The study also found that liquidity has improved, transactions costs lowered, and market efficiency has not been harmed by HFT during regulator market conditions. HFTs now provide the bulk of liquidity, but their use of limited capital combined with ultra-fast speed creates the potential for periodic illiquidity.

Related articles

  1. Agency broker moves beyond execution to offer a broader suite of services.

  2. Algorithms have become more prevalent in the spot FX market.

  3. Congress Unlikely to Act on HFT

    QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.

  4. Breaking data silos is key to deploying automation beyond 'nuisance' orders.

  5. They can be used on quantum hardware expected to be available in 5 to 10 years.