Although automated trading includes fund managers using broker algorithms, as well as trading firms with their quantitative and higher frequency trades, the events of the day focused the debate on speed; specifically who has it and is it a level playing field?
May 6, 2010 will always be remembered as the Flash Crash. The speed at which the price decline occurred was surprising, hence the initial belief that it had to be caused by HFT strategies. This was such a significant event that both the SEC and CFTC were involved in the investigation. The joint report highlighted a fragmented and fragile market where “a single large trade could send stocks into a sudden spiral.” Prices stopped falling “at 2:45:28pm, trading on the e-Mini was paused for five seconds when the CME stop logic functionality was triggered.” Rules have since changed to ensure synchronisation of circuit breakers in a multi-liquidity environment.
The public will debate anomalies, albeit unintended, that come from interaction with the market. They will have a fair expectation that all participants have equal access to the market, and that the market will have rules that are up-to-date with the emerging products and technology.
One thing is for sure, as one Asiabased prop trader stated, there is now a “much healthier level of introspection” and the industry is swinging around in a full circle; what was once old is new again.
What Comes Next?
Even the briefest review of events must conclude that competition will continue evolving the markets and its participants. There has been more than a decade of significant investment; it does make you wonder what will be the next real innovation. How this will shape the business of brokerage, and the exchanges and investment managers, is something that requires much further examination.
One Asian prop trader thinks that there will be “consolidation amongst exchanges, regulatory cohesion, and HFT firms will consolidate; all this is pulling back,” while one US trader simply said “ten years ago I could see the world moving to where it is now, but I cannot see what comes next.”
Exactly what the future looks like is an issue that we will continue in the follow up to this piece, but one thing is for sure, winning isn’t just about being faster.
Go to www.fixglobal.com/content/be-careful-what-you-wish to read Weng’s thoughts on what comes next in high frequency trading, the role of brokers, and the wider future of the industry.
Winning Isn’t Just About Being Faster, It’s About Being Better
