IDX 2014: Negativity over HFT needs to be reversed, argue exchanges
Regulators need to be better educated about the benefits of high-frequency-trading (HFT), according to a panel comprised of the chief executive officers at some of the world’s leading exchanges.
“Empirical data shows that HFT is a stabilising factor in the global markets. But there is a need to educate people in the mainstream and regulatory agencies about this better,” said Andreas Preuss, CEO at Eurex, speaking at the International Derivatives Expo (IDX) 2014 in London.
His comments come as regulators including the Securities and Exchange Commission (SEC) are looking to improve transparency at HFTs and dark pools. The SEC wants dark pools to be subject to additional review amid concerns prices are not always disseminated equally to investors.
HFT has been at the forefront of regulators’ priorities following the publication of Michael Lewis’ “Flash Boys” which argued that some HFT traders were using sophisticated technology systems to trade ahead of retail investors. The SEC is hoping to address these issues.
While the SEC is reluctant to impose speed limits on trading, reports have said the regulator is exploring ways of minimising the speed advantages some firms have. Some HFTs could be forced to post more definitive bids and offers for longer periods of time, for example. SEC chairwoman Mary Jo White has also proposed HFT firms register with the SEC and attain membership of the Financial Industry Regulation Authority (FINRA). In addition to this, the SEC is likely to demand greater transparency from HFTs about the algorithms they use.
“HFT forms a small percentage of trades but it helps the market structure. If we look at US equities, the bid offer spreads have reduced, it is easier for retail investors to access markets and it lowers trading costs. HFT also improves the day to day liquidity of the market, and HFT does not move markets. Most HFT is conducted by day traders,” said Garry Jones, CEO at the London Metal Exchange and co-head of global markets at Hong Kong Exchanges and Clearing, also speaking at IDX 2014.
It has been more than four years since the 2010 Flash Crash, which saw the Dow Jones Industrial Average plunge by around 1,000 points only to recover in minutes. A report by the SEC and Commodity Futures Trading Commission (CFTC) said the Flash Crash was prompted by a fat finger trade at a mutual fund which facilitated panic buying and selling, much of it fuelled by HFTs.
There have been calls for more regulation of HFT and automated traders amid concerns another Flash Crash is still a possibility. In 2012, Knight Capital had to be rescued by a consortium of investors led by Jefferies when it incurred $440 million in trading losses when its new computer system spectacularly malfunctioned.
The Managed Funds Association (MFA) in Washington DC has also urged tighter controls. In a paper published in 2012, it recommended appointing personnel responsible for suspending all or part of a firm’s trading program in the event of a malfunction and urged regulators to consider forcing broker dealers to bolster their pre-trade risk controls by requiring them to check credit or capital thresholds on an order-by-order basis.
The SEC recently enacted its Limit-up-Limit-down mechanism, a system designed to mitigate extreme price swings. Limit-Up-Limit-Down requires exchanges, broker dealers and other trading centres to establish procedures preventing the execution of trades and offers outside of a specified price ban.
