April 2012 – sponsored by: NovaSparks; ONETICK; Sybase, an SAP company

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Is the Gain Worth the Pain?

If you had to point your finger at the single most controversial and emotive issue currently in the financial services industry, high-frequency trading (HFT) would be it. But that’s understandable, thanks primarily to the May 6, 2010 Flash Crash, which overnight thrust the HFT industry-not just in the US, but globally-into the spotlight. And, as a result of a number of other “loss” incidents since then, HFT has, rightly or wrongly, been blamed for a bewildering array of the industry’s woes, which, in turn, has drawn disproportionate scrutiny from global regulators. That, too, is understandable, given regulators’ primary remits, regardless of their geographic location and jurisdictions: to ensure a fair, transparent and reliable marketplace for participants of all shapes and sizes to trade financial instruments.

It is therefore safe to assume we’re going to see at least some level of regulation impinging on the HFT market, although quite when that regulation is going to be introduced, how invasive it might turn out to be, and what it will look like in its final form in terms of the specific practices it seeks to curtail, is anyone’s guess.

In the Q&A section of this special report on page 10, respondents discuss the technology implications for firms looking to establish HFT environments by reducing latency throughout their networks; the extent to which HFT has permeated other asset classes over and above its equity stronghold; and the likelihood of invasive regulatory controls, which, while necessary to ensure an orderly marketplace, might affect the efficacy of HFT strategies to the point that firms might decide the gain simply isn’t worth their pain. Granted, HFT is not for everyone-long-only asset managers are, for example, interested in anything but HFT. But if you consider that as much as 70 percent of all equity volume in the US market is executed in an HFT environment, losing market participants will have a marked impact across the global financial markets.

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