Michele, do you have any final points you would like to make?
MP: The focus on HFT has attracted attention all across Europe. Only recently, Italy’s leading newspaper La Repubblica1 , published a special report on the topic.
As regards multiple posting activity there are two points to remember. Firstly, it is normal that when you want to strike a trade, you need to advertise your goods, and more advertising will increase your probability of closing the deal. When it comes to HFT, this latency arbitrage you described has been qualified by some in the market as ‘painting’ or ‘manipulating’ the book. At a consolidated level, what gets shown in the order book by HFT is not what he or she is willing to trade, given that being ‘hit’ on one venue can cause the cancellations of the orders resting in others. Nevertheless, it is true that orders are in the markets for a very short amount of time, and if someone starts interacting with them using faster or smarter technology, they will increase the probability of accessing all the liquidity pockets before the cancellations happen. However, the second equally important point is that in any economic activity, the marginal improvements in performance have to be worth the additional cost.
Ferber’s effort to qualify HFT activity is taking us in the right direction, given that “you cannot regulate someone you cannot define”: the maximum messages-to-trade ratio looks a better constraint than the initially discussed minimum resting period, which is likely to impact the current market microstructure at a deeper level. Given the low volumes currently being experienced in the European market, excessive penalties/constraint on an agent category which is estimated to trade 40% of the daily turnover2 could have undesirable effects. At the same time, despite many HFT strategies being ‘flat’ on a daily basis, they still carry an element of risk up to settlement date.
As it stands today, there is no consensus in academia or the industry as to whether HFT is indeed damaging or positive to institutional trading or the market.
This can be explained, of course, by the lack of high quality data available. I hope to see the emergence of more convincing research before regulators make drastic steps in any direction to address the HFT issue – either to facilitate HFT into the small and medium enterprise (SME) space or to curtail existing activity in liquid names – regulators and the buy-side need to be engaged with the right market structure teams and research into an area where there is a material knowledge gap across the whole industry.
[1] http://inchieste.repubblica.it/it/repubblica/rep-it/2012/04/20/news/numeri_inchiesta-33637371 – in Italian
[2] Bank of England Report, 2010,http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech445.pdf
Quantitative Trading:Sourcing Liquidity And Managing Momentum
