WHAT’S IN A NAME?

High Frequency Trading seems to be a catchphrase for all and sundry but John Greenan explains why HFT is so hard to define.

Q. Is high frequency trading good for your business, the market and end investors?

A. To begin with one of the things about high frequency trading is that not many understand what it actually means. It is a not relationship based form of trading but it has become an umbrella term used as a pejorative. However, I think the HFT community has been somewhat remiss in defending itself and has not tried to state the case for HFT. The phenomenon has been around a long time in different ways.

As for whether it is good for business, I do not think the answer is clear. There is a lack of intelligent and rigorous studies about the impact HFT has on the market, end investors and business in general. I think there needs to be more analysis going forward.

Q. How would you define HFT?

A. One of the problems though given our current environment is that there is no nice soundbite to sum up what HFT means. I would not define it as such but categorise HFT in terms of the ratio of cancels that is sent to an execution venue versus the number of orders. In the past, you would place an order on the order book and expect it to be executed. Today, I would look at HFT on a case-by-case basis. Some of the criteria I would look at are the traders’ intentions, trading strategies and the tools being used.

Q. Some market participants will say that liquidity is one of the positives of HFT. Do you agree?

A. HFT focuses on intraday liquidity and attempts to create a two-sided market without market making obligations. It is difficult though to determine whether HFT does actually create liquidity. However, by coming to the market, high frequency traders arbitrage away any price differentials and that does create value in that it makes the market more efficient.

Q. What impact do you think the current regulation will have?

A. In effect policy makers will draw a line in the sand and everyone will have to fit in around that. One of the problems is that the desire to regulate has increased massively since the global financial crisis and this has changed what people view as acceptable. At the high level The Securities and Exchange Commission (SEC) is continuing to discuss which direction new rules on high-frequency trades should take, while in Europe there are regulations such as MiFID II. They have not made any statements but are asking a lot of questions to the various market participants. It does not seem possible in this current climate to have a rigorous and in-depth debate.

The anti-HFT lobby is driving the discussion but the community needs to be more proactive about what it brings to the market. Take the ‘flash crash’, the finger pointing and blaming was enormous but I do not believe that there is enough hard evidence to show who was at fault. Instead, there was an element of control mechanisms not being in place, which is why it is so important that people build and have the right risk management systems in place.

Q. What do you think will be the outcome of all the regulation?

A. As with any human action there will be intended and unintended consequences. It is not clear what the final result will be but there will definitely be more regulation. In terms of the impact, it will cause problems as well as create opportunities. New market participants may benefit while existing ones could feel the pain. We are seeing many firms hiring regulatory affairs liaison officers in order to keep up to date with the latest developments. Their job is to regularly talk to the regulators which will help them identify the potential new and future opportunities.

Q. Against the backdrop do you think we will see a new generation of HFT?

A. There is talk of a new generation of tools being developed but I think it is more of a generational shift. What we are seeing is a technological arms race in the purest sense. One firm builds a state of the art tank and then another firm develops the technology to blow it up. At the end of the day it is the same thing but the technology is better and faster which in turn opens up more opportunities. It’s like what Sean Connery’s character Malone says in the film The Untouchables – you don’t bring a knife to a gunfight. You need bigger guns.

Q. Who are the market participants?

A. The barriers of entry are high in terms of finding people with the right skill set. You may have the cash but there is a steep learning curve and training people is not that easy. If you are a new firm, you may want to poach someone away from their existing firm but that is a slow growing strategy.

Q. What impact do you think the current spate of exchange consolidation will have on the industry?

A. I think it will take time to see any impact because all of these mergers are subject to regulatory approval. All the moves, whether it is London and Toronto or Deutsche Bšrse and NYSE Euronext, are defensive but at the end of the day what matters is whether they can deliver the technology at a lower cost. If they move towards FIX interfaces and traders can connect in a more cost efficient way then I don’t think people will care who the owners are or what the stock exchanges are called. In many ways it is like the development of the electricity industry in that no one cares about the owners as long as they can plug into their own supply.