How does HFT resemble agriculture?

Ana Herrero-WallaceHigh Frequency Trading (HFT) is one of the hottest topics under discussion in the review of MiFID. Many of us might not be experts in HFT, but I doubt if our European Parliamentarians are either. They will be voting on HFT and whether increased regulation of this activity is needed in order to guard against the systemic risk they so desperately want to avoid. However, let’s not forget that the same Parliamentarians vote on policies covering agriculture, fisheries, employment, energy, science and technology, amongst many others things.

Does HFT really provide any liquidity or is it just taking advantage of the market? Should the regulator allow the Ferrari to drive at great speed while the other cars on the road observe the speed limit? Does HFT provide an unfair advantage?

These are all important questions but whether HFT provides real liquidity or not is an important issue and one where there is a lack of factual data to support the argument on either side. Steve Grob has addressed some of these issues in his fragmentation blogs and in the first episode of FragVision.

The industry needs to lobby Brussels (we still have until May!) to keep an open mind until there is better evidence to support further action on HFT. Those making the decisions will have to develop the same depth of understanding of our markets as they have for some of the apparently more comprehensible subjects on which they vote. Otherwise, there is a real possibility that they will reap what they sow based on a degree of ignorance.

A ‘dream team’ has recently been set up to study the impact of HFT led by former LSE chief executive Clara Furse. Let’s see how well they get on.

Do you think the 'dream team' will be effective in bringing to the regulator's table the necessary evidence?

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3 Responses to “How does HFT resemble agriculture?”
  1. Colm Furlong says:

    MiFID II focus on HFT was inevitable given the hyped media attention on the practise of trading at very high speeds. This mirrors the scrutiny on HFT by the SEC in the US where HFT is strongly established.

    How much HFT is actually going on in Europe is still in question, I do not know of the availability of any reliable figures on that. The expectation is though, that however much is going on, this will continue to increase and some of our key customers operate in this space as practitioners or suppliers of HFT infrastructure to their customers.

    I think it is pretty obvious that some HFT models do provide real liquidity and this has helped in reducing trading costs in Europe – especially for the little guys. It also improves market pricing efficiency. Regulators can only see this as a benefit.
    On the downside for the architects of MiFID and MiFID II they are still missing the target – One of the key cornerstone objectives of the original MiFID was the encouragement of new “liquidity” from outside the European bloc. The target was institutional investors from other geographies looking to invest their funds. The method was reduced trading costs by various means.
    The mistake here (apart from not even seeing HFT coming at all) in my view was the regulators interpreting the goal as attracting “liquidity”. HFT came to Europe and brought liquidity – however HFT is precisely the kind of activity that the big investors don’t like. HFT increases their market impact costs of their investment and does not provide any depth of liquidity.
    In reality there is now no hiding place from HFT as the practise goes truly global and investors need to find new ways of dealing with that changed landscape.
    It is interesting to see how much MIFID II might look to rein in the practise of HFT but it seems that the regulators must decide what they prefer, low costs and tight spreads that help the little guys or potentially predatory algorithms that potentially remove value from big institutional investors. A banning or discouragement of high speed trading seems very remote and looks quite short sighted.

  2. Bruce Bland says:

    HFT arbitrage has been going on since the birth of the order driven markets many years ago. The fact that the competition in this market has forced latencies lower and lower is not all that surprising, and banning the practice would seem to be unlikely. Regulators should however seriously look into the systematic risks associated with algorithmic trading in general to avoid the chaotic market conditions that generated the flash crash in the US last year. Knowing regulators though it is not likely that any action will take place on either issues until a more serious incident occurs !!!

  3. Dave Gordon says:

    First of all I’m looking forward to their definition of HFT. Then their reasons for why HFT, on its own, needs extra regulation. The same speed limits apply to Ferraris and Austin 7s, they drive on the same roads, and everyone is free to buy a Ferrari if they want to get away from the lights first. The extra speed might cost them though.

    Before I stretch this metaphor totally out of shape, it seems to me they are confusing HFT with its close partner, algo trading. The removal of human intervention in trading, and the likelihood of poorly written algos seems a more worthwhile target for regulation.

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