Email of the day (1)
Comment of the Day

September 16 2011

Commentary by David Fuller

Email of the day (1)

More on HFT, from a practitioner:
"It's been a while since we emailed, I hope you are doing well!

"I respect you a lot, but must disagree on your concerns regarding HFT.

"HFT is a broad term, it can cover a wide range of strategies, from market making (liquidity provision) to ETF arbitrage/program trading.

"From personal experience I can tell you that the market making strategies are really reactive to market conditions, they are not the cause of the current increase in volatility we are experiencing.

"I would greatly appreciate it if you took the time to read the article below [Ed: linked here]. It explains in a very intuitive way why putting the blame on HFT for the current volatility is simply not logical."

David Fuller's view Thanks for your comments and the link.

I posted an earlier email from you and am happy to host this one in the interests of a balanced discussion, since you are the founder of a high frequency trading firm.

I did not find the article above particularly convincing but it is difficult to identify the cause of volatility. However, if a few HFT firms now account for 60 percent or more of daily volume, to assume that they are mere reactive stretches credulity, in my opinion.

As a close observer of markets since the mid-1960s, I also think that HFT is responsible for a much higher and more persistent correlation among instruments than I have ever seen previously. Where it used to be a rarity, it has increasingly become the norm.

I found some of the other articles from the 'Blogs' section of the High Frequency Traders website more interesting, including Dan Hubscher's: "HFT Volume: Cool Liquidity or Just Hot Air?" Including this section:

This is the same as with any tool or technology or trading model - there are beneficial and irresponsible or harmful uses; the line between them is blurry, and the distinction springs from the user of the tool, not the tool itself.

So what are we to do with the "Bad HFT?" This seems to be the real question. So far we've heard:

The regulators haven't figured it out and can't - regulators worldwide have managed to define a small number of abusive trading scenarios, and demand compliance, but they can't hope to cover it all

The markets themselves haven't figured it out and don't have much incentive to do so

The market participants can't come to a consensus - and probably won't

Wishing HFT away won't fix it - either by slowing it down with a Tobin Tax, or a liquidity fee, or by outlawing it altogether - that is throwing out the baby with the bath water and someone will always find a way to abuse what remains.

What we are left with is the capitalist mantra of "buyer beware." But there are ways that the buyer can equip himself to join the 21st Century and - at the same time - protect himself from high frequency errors, fraud or predators.

As we've often said, high speed trading needs high speed controls. Like a car racing down the highway, some controls will come from the lurking cop (the regulator). But the driver needs to make sure the brakes work as well as the gas pedal in order to avoid an accident. Of course, the speed itself begs the question of whether HFT needs to have a speed limit in order to stay under control. We don't think a speed limit is necessary.

Instead, the issue is detecting abuse and mistakes, regardless of speed or source. If you have the market surveillance and monitoring tools that can alert you to problems occurring at high speed - if you can monitor your own car, and the cars on the road around you and see a problem coming - an accident can be avoided. And if there is no accident, despite how fast the car is going, then the cops won't have to be called out.

"The Ebbs and Floes of the August Winter" is also worth a look.

Subscribers interested in the HFT debate will find a number of entries in our Archive. Just use the Search facility shown upper-left, fourth item down and search for high frequency.

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