hft - Blog - Global Risk Community2024-03-28T19:19:02Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/hftMiFID II – Trade Automation, Part 2https://globalriskcommunity.com/profiles/blogs/mifid-ii-trade-automation-part-22013-04-02T08:30:37.000Z2013-04-02T08:30:37.000ZKiki Pentheroudakihttps://globalriskcommunity.com/members/KikiPentheroudaki<div><p><i>by Kiki Pentheroudaki </i></p><p>We have discussed the historic development of automated trading and how regulators are pushing high-frequency traders to become market makers. We now want to look at further ways to regulate automated trading under MiFID II.</p><p><a href="http://www.thetradenews.com/news/Trading___Execution/Dark_pools,_HFT_braced_for_a_tough_2013.aspx">The impact of high frequency trading (HFT) flow on markets will also see continued attention from market participants and regulators alike</a>. In 2012, significant regulatory attention focused on HFT, such as provisions in the European Parliament's version of MiFID II. The document called for venues to instate order-to-trade ratios, a 500 millisecond minimum resting time for orders, and a ban of the maker-taker pricing model, which rewards posting passive liquidity but can lead to potential conflicts of interest among market participants.</p><p>For HFT there are concerns that not all high frequency traders are currently required to be authorised under MiFID as the exemption in Article 2.1(d) of the framework directive for persons who are only dealing on their own account can be used by such traders. While HFT represents an increasing and substantial share of market transactions and the liquidity they provide to the market may replace the more traditional market making activities, high frequency traders have no incentive or obligation to continue to provide ongoing liquidity in a distressed market situation unlike registered market makers.</p><p>High-frequency traders usually remain in the market for a mere blink of an eye but this restriction – an introduction of the 500 millisecond latency in a bid to make a stand - against the rise of high-frequency trading could significantly alter the way they operate and could also have unintended consequences for the wider market.</p><p>The HFT community says that Brussels’ plans will result in less liquidity and wider spreads for other market participants, while some in the market believe HFT will likely benefit from the move anyway as they will just pinpoint 499 and 501 milliseconds in the future to generate their profits (the original MiFID regulation made no such provision).</p><p>From a wider regulatory perspective, the CFTC and SEC are currently reviewing rules on Automated Trading and HFT. They are working together with the markets to consider recalibrating the existing market-wide circuit breakers. The CFTC has published proposals targeted at specialist automatic trading rules as part of the rules for the newly introduced Swap Dealers and Major Swap Participants. Persons involved in "automated and high frequency trading" who are direct members of a regulated market or MTF will be required to be authorised and supervised as investment firms. There will be specialist rules for firms involved in algorithmic trading including compliance, risk controls, and notification to regulators of algorithms. In addition firms will be required to flag the use of algorithms in transactions and orders.</p><p>Several concerns have been raised regarding the very broad scope of the proposed provisions, in particular on the obligation for algorithmic traders to provide liquidity at all times, and the legal uncertainty that would be created by the fact to leave the specification of the scope of this provision to delegated acts. Independent investors said they hoped MiFID II would shield them from HFT practices, which are often accused of distorting stock markets and profiting at the expense of traditional market players.</p><p>Regulators need to find a balanced approach of checks and balances to weed out the ‘bad’ HFT from the ‘beneficial’.</p></div>The hare and the tortoise: the fastest is not always the strongesthttps://globalriskcommunity.com/profiles/blogs/the-hare-and-the-tortoise-the-fastest-is-not-always-the-strongest2012-09-19T09:32:03.000Z2012-09-19T09:32:03.000ZSebastien Jaouenhttps://globalriskcommunity.com/members/SebastienJaouen<div><p>Despite the current economic turmoil, we have recently witnessed a frenetic race for ultra low latency, privileging speed over costs. But now the reality of these decisions is catching up and trading institutions are finding that the fastest is not always the strongest – much like the hare and the tortoise.</p><p>Being lean and controlling costs is a new priority for banks, focusing on their core business. We are seeing major changes in strategy, with organisations moving away from the extremely risky high frequency trading (HFT) which has become more popular and going back to basics where the focus is on servicing customers and offering brokerage services. These HFT teams are not simply disappearing but they are opening their own businesses, stepping outside global tier one banking institutions. The race for speed for these break away teams is still on. </p><p>As brokerage margins continue to decrease on mainstream asset classes, brokers are swiftly investing in electronic platforms for Swaps and FX. They do so in line with regulations such as MiFID II which is designed to bring greater transparency and promote best execution.</p><p>All this triggers new requirements to connect to multiple platforms worldwide and managing client connectivity on a global scale. Although major tier one banks have enough staff to manage these connections, the challenge is in leveraging new markets and connecting to new pools to survive in the near future.</p><p>Survival is not only a question of costs and economies of scale for small and large institutions. Externalising connectivity for market data, trading applications, electronic platforms and clients is key when focusing on core business and getting the most out of existing resources. Expansion into new markets is also essential to drive future success. Banks should look to partners offering quality SLAs and reliability to expand their reach and win the connectivity race. </p></div>Transparency for High Frequency Trading Regulators, an Introduction. Contributed by Walter Hendrikshttps://globalriskcommunity.com/profiles/blogs/transparency-for-high2011-02-01T15:30:00.000Z2011-02-01T15:30:00.000ZBoris Agranovichhttps://globalriskcommunity.com/members/BorisAgranovich<div><p></p>
<p>A couple of weeks back I was approached by a HFT magazine editor and he asked me whether I would be interested to write down some of my experiences in HFT. As I am not directly participating in the midst of HFT at this point, I had to give it quite some consideration. Why would I do this? Placing myself in a vulnerable and visible position is not my first nature. Still I strongly believe in taking away the mystique or even – allow me – hysteria regarding this type of Capital Markets business. In my opinion the world of low-latency/hi-freq trading has to try and get rid of the negative image. It deserves some consideration to explain in a bit more detail what HFT is all about. What techniques are being used and – more generally – what the business reasoning behind HFT is. </p>
<p><br /> So why does HFT need more transparency? Very simple. EU lawmakers in Brussels and national regulators have very little knowledge regarding the business and technological concepts driving HFT.</p>
<p>This can automatically lead to potential actions that can harm the trading firms directly.</p>
<p> </p>
<p>Secondary effects can be envisaged impacting liquidity and widening spreads on multiple platforms. I will get back to you regarding the implications of losing liquidity and widening spreads some other time.</p>
<p> </p>
<p>First the negative effects of lawmakers and regulators not having any clue what HFT is all about.<br /> About a year ago I was invited to be part of a speakers panel at one of the first professional Hi-Freq conferences in London. At the time I was MD at an Algo/HFT market making firm primarily participating in quantified dispersion of volatility and equity arbitrage across multiple venues. We spoke about market access, risk and regulatory influences. I became very enthusiastic recognising attendees from the FSA and the Dutch and French regulators at this conference. On the podium I invited the Hi-Freq world to open up towards each other and break down the barriers. At the same time I invited regulators to step into my office and literally have a look at what we exactly did. It took another couple of phone calls and emails on my initiative before representatives from the Dutch and UK regulator actually did visit the office. I’ll point out two very important remarks they made that will paint us a picture still waking me up in the middle of the night...</p>
<p><br /> Looking at the order books and depth of Nokia quoted on OMX Helsinki and Nokia quoted on Chi-X one of them asked the following: “The order book on OMX we believe, but we are under the impression the order book on Chi-X is not real...”. The other remark was one regarding liquidity providing on multiple platforms: “We consider demanding liquidity providers and arbitrage traders to keep their quotes in the market for a minimum time, for example one second”.</p>
<p> </p>
<p>I won’t disclose which regulator came up with what question and to be honest, I am happy with the fact they put their questions forward. At the same time it clearly tells us where they are in understanding the business they have to regulate.</p>
<p><br /> Obviously I spend a bit of time explaining how a multilateral trading platform like Chi-X works and what would happen if arbitrage traders have to keep their quotes in the order book for a minimum time frame. It just goes to show that although MTF’s came to live due to the implementation of MiFID in 2007, the lawmakers and regulators still had to do their homework. On the other hand this is fact of live the Capital Markets business and more specifically the HFT world needs to take into account.</p>
<p> </p>
<p>I can already hear you think: “Do we have to educate those regulating us?” And the answer is ‘Yes’, I am afraid. If we would like to continue trading with algorithms on a low-latency infrastructure connecting multiple exchanges to trade extremely tight spreads, we have no choice.</p>
<p><br /> Nobody needs new EU regulations based on a lack of understanding what this business is all about. Fortunately some of the top tier market making firms in Europe and the US understand this difficult situation. They have started to write down specifics regarding the trading techniques used and the ball is definitely moving towards the corner of the regulator. Now it’s up to the national regulators and the European Securities and Markets Authority (ESMA) to pick up from here and start communicating with the HFT world to get a better understanding.</p>
<p><br /> As promised next time I’ll discuss a bit what liquidity means to the financial markets. Don’t hesitate to let me know what you think!</p>
<p><br /> Best regards,<br /> Walter Hendriks<br /> Principal Advisor<br /> Financial Markets Advisory - fm-advisory.com<br /> wh@fm-advisory.com<br /> 17th of January 2011</p>
<p></p>
<p> </p></div>