Regular readers of this blog or the companion Bulletin will remember that I have touched on the topic of High Frequency Trading and its importance to capital markets several times over recent months. High Frequency Traders look to trade more efficiently and profitably by employing techniques that depend on the ability for frequent trading through rapid market links. To perform this function the larger traders make extensive use of complex algorithms to calculate what, and when, to buy or sell, and employ the latest technology to shave a few microseconds off the time it takes them to trade. HFT has been controversial with some commentators and regulators who cite it as an unhealthy market practice. However, the evidence is that the role of HFT is more complex. For example as we reported in October last year the reports on May’s US market ‘Flash Crash’ highlight the complex interactions and different roles of the market players, from stock exchanges to trading firms. For example, the US federal regulators report gave mixed messages for high-frequency/algorithmic traders who seemed to have initially had a positive or stabilising impact in absorbing the selling pressure, but then came in for criticism when several chose to withdraw from the market as it became obvious as to the seriousness of the ‘Flash Crash’.
Whatever the exact role of HFT, its importance is now unmissable. A TABB Research study amongst US buy side equity managers that highlighted HFT as the main market structure and regulatory issue. In the UK, TABB found that 77% of the flow in lit markets and order books can be categorised as HFT and according to TABB “this highlights why investors seek alternative execution strategies to achieve best execution.”
So it is no great surprise then that the UK government launched a study into HFT this month, although the appointment of Dame Clara Furse, the former CEO of the London Stock Exchange (LSE) to lead it, may lead some to think it may have some bias towards established exchanges.
