The reasons HFT is shifting asset classes may surprise you

At Solace, the shift to electronic trading has been at the core of our business in capital markets for many years. We’ve seen a variety of recurring use cases that are now mainstream, specifically for equities. For example:

  • Buy-side firms engaging in high-frequency trading (HFT), either onsite or at a co-location facility.
  • Sell-side firms offering smart order routing or internal order crossing to increase revenue or save on costs of order processing.
  • Exchanges accelerating and enhancing their services to compete with ever more sources of liquidity.
  • All kinds of capital markets participants improving how they handle real-time risk across trading systems, and/or automate middle-office settlement and record keeping.

Reg NMS and the Explosion in HFT

The path to these systems began with decimilization of equities in 2001 which dramatically increased electronic trading. Then in 2007, Reg NMS opened the door for many more competitors to supply liquidity, which created a n-way set of very-short lived arbitrage opportunities across trading venues.… Read the rest

High frequency trading back in the political crosshairs

This week at the Futures Industry Association (FIA) conference, the hot topic is whether government regulators should force the registration and regulation of high frequency trading firms. As this Wall Street Journal article highlights, government regulators know they don’t fully understand the impact of HFT on global markets, especially how they help or hurt non-HFT traders.

There is fairly clear evidence that HFT has lowered spreads by providing increased liquidity when markets are running smoothly, but there have also been incidents like the “Flash Crash” where HFT appeared to play a role in the panic as automated trading systems exited the market when volatility spiked. The press loves controversy, so most of what you will read about HFT is negative—highlighting what might or could go wrong.

If efforts regarding regulations proceed, I hope HFT gets a fair trial. In the current economic climate and election cycle, there’s a real risk that media punditry, political grandstanding, and whatever voice the Occupy Wall Street movement ends up contributing might skew an outcome before the data and facts are understood.… Read the rest

The good and the bad of circuit breakers

Whenever markets go haywire as they did during the ‘flash crash’ of May 6th, there are inevitable calls for changes to ensure it doesn’t happen again. This time around the pundits and politicians are calling for circuit breakers to slow down trading when individual stocks or the overall markets goes into freefall. CNBC did a good job of summarizing what’s on the table in the way of circuit breakers in this recent article.

Assuming we get circuit breakers, there is no doubt that they will have a dramatic impact on high-frequency and algorithmic trading. How can you enter into a trade or a hedge in a fast market if you are at risk of one half of the trade being busted after the fact? If you had a buy and a sell that were 30 seconds apart to capture a ¼ point move leveraged 20 times, you have a 5% profit.… Read the rest