Email of the day (4)
Comment of the Day

September 13 2011

Commentary by David Fuller

Email of the day (4)

More on HFT:
"I continue to enjoy the service you and Eoin provide. Your comments and audio on HFT influence has been of particular interest and I am curious what you make of the below article from Bloomberg. I have a fairly biased view here, more in line with what a typical HFT firm would put forward. However I am open and keen to hear both sides of the argument."

David Fuller's view Thanks for the feedback and also for this interesting link.

Academic studies on just about any complex subject are certain to produce different conclusions so interested parties may wish to read the full article. Here are the last two samples:

High-speed trading isn't likely to merely "fast-forward" markets, according to one paper in the U.K. report. "It seems more likely that despite all its benefits, computer-based trading may lead to a qualitatively different and more obviously nonlinear financial system in which crises and critical events are more likely to occur in the first place, even in the absence of larger or more frequent external fundamental shocks."

If small changes can produce "widely different" outcomes in the market, then prices and volumes may be "prone to cascades, contagions, instability" and other effects, the paper said. Even temporary results could lead to irreversible events such as bankruptcies if they cause forced sales or trigger penalties in contracts, it said.

Transaction Costs

Another paper found that the growth of computerized trading has led to lower transaction costs for retail customers and institutions and improved liquidity -- measured by the difference between the highest price at which someone is willing to buy and the lowest sale price, along with other metrics. Faster trading has also led to "greater potential for periodic illiquidity," the paper said.

Regulators and trading professionals must improve their understanding of how humans and robots interact, especially since "future trading robots will be able to adapt and learn with little human involvement in their design," according to the third paper. The need to analyze the consequences of these changes becomes more important as computerized trading grows and the number of human traders declines over the next decade.

"The number of human traders involved in the financial markets could fall dramatically over the next 10 years," the paper said. "The simple fact is that we humans are made from hardware that is just too bandwidth-limited, and too slow, to compete with coming waves of computer technology."

Perhaps I have an overactive imagination but this sounds to me like a recipe for trouble.

A Search of our Archive (see link upper-left, fourth item down) will produce 46 items on high-frequency trading, although only those posted over four months ago are accessible to non subscribers.

Here is a short item on HFT published by Bloomberg today:

High-Frequency Traders May Face Tougher EU Market-Abuse Rules

By Jim Brunsden
Sept. 13 (Bloomberg) -- The European Union is considering listing “specific examples of strategies using algorithmic trading and high-frequency trading” that should be banned and punished by regulators as market manipulation.

The measures to increase investor protection and reduce volatility are part of plans to clamp down on market abuse in the European Union, according to a draft of the proposals obtained by Bloomberg News.

“There are particular automated strategies that have been identified by regulators which, if carried out, are likely to constitute market abuse,” the document says. “Further identifying abusive strategies will ensure a consistent approach in monitoring and enforcement by competent authorities.”

High-frequency traders have come under increased regulatory scrutiny following the so-called flash crash in May last year, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

Michel Barnier, the EU’s financial services chief, has said the tougher market-abuse rules are needed because current sanctions are too weak.

Under the proposals, regulators would get the power to set maximum fines for financial services companies of at least 10 percent of their annual sales. Individual traders would face fines of at least 5 million euros ($6.8 million) for the worst infractions.

Traders found guilty of “intentionally” engaging in insider dealing and market manipulation should face criminal sanctions that are, “effective proportionate and dissuasive,” according to the draft rules.

Under the plans, which would need approval from governments and members of the European Parliament, unsuccessful attempts to manipulate markets should also be punished.

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