High Frequency Trading – Regenerating HFT
Thu, 14 Feb 2013 04:42:46 GMT
This blog post by Ronan Manly was originally published at the Total Trading blog, and is reproduced here with kind permission.
In the first morning session, Mike O’Hara, CEO and co-founder of the HFT Review, introduced the morning’s proceeding which focused on the topic of Regenerating HFT. Mr O’Hara pointed out that although a lot has changed in the last three years with increased media attention on the HFT area, there is still a lot of media ignorance on the topic. The challenge for participants in navigating the area and navigating the media is that everything is still changing, the regulatory structure, the market microstructure, as well as the technologies being used.
Dominic Swords of Henley Business School kicked off the discussion noting the main themes, namely the interaction of regulatory influence and market behaviour, the question of whether the HFT sector has stalled in growth and evolution, and the advent of competition in the last ten years which has eaten into trading returns.
Mr Swords highlighted that the regulators are focused on the macro economic risks of HFT, essentially the extent to which HFT is helpful to the market, and the extent to which HFT is unhelpful.
Assuming HFT has inceased efficiency, such as by reducing transaction costs, Mr Swords saw three key areas of risk remaining. Firstly, in periods of illiquidity, HFT’s low capital and high frequency nature might combine to sometimes step back and add to the market’s illiquidity. Furthermore, HFT, since it involves algorithms jumping on to small price movements, can sometimes amplify small changes in market movements and magnify volatility, i.e. a self-fulfilling prophecy. Lastly, since HFT combines market access, information access and speed of response, it is open to market abuse. Trade data can of course be analysed, but its far harder to guage the motivation for trades and very difficult to model these patterns. As Mr Swords phrased the challenge of regulators dealing with the HFT sector: “The hopeful in pursuit of the unknowable.”
Later on in the same session, a panel discussion examined to what extent speed, transparency and fragmentation will change in the HFT space.
Patrick Boyle of Palomar Fund Management thought that the days of easy growth in HFT are over. While technology has evolved rapidly, this has necessitated huge investment in resources, creating a high cost base. Endless profits through speed are not sustainable and the easy trades have been done. However this has not stopped the exchanges’ continued interest in acquiring some of the independent HFT operators.
Donald MacKenzie of the University of Edinburgh agreed that with the sector now maturing, the low hanging fruit has been taken with overall industry profitability shrinking dramatically in the last few years.
Graeme Burnett, active in a number of HFT projects and formerly of Morgan Stanley, predicted that HFT evolution might include a central exchange for trading as well as new trading strategies making use of market intelligence, with the development of sophisticated news analytics, such as analytics developed by the military.
On a separate point Graeme also highlighted that some HFT industry participants are now starting to look at using software and language design originally used in the graphics and gaming industry, so cross-overs between technology and finance that may have seemed far-fetched in the past may now actually begin emerging commercially.
Overall the panel think speed will continue to increase, transparency may increase although the regulatory response is important here, and fragmentation will probably fall through market consolidation.
Ronan Manly, recently returned to London, has an interest in the evolution of exchange trading from his time working in firmwide and prime brokerage trade processing technology at Morgan Stanley, and from managing equity portfolios at Dimensional Fund Advisors where electronic trading is used extensive by the company’s inhouse trading desks. He also has an interest in studying monetary gold and the gold market.