High-Frequency Trading Continues to Grow, Despite Regulatory Initiatives, Reveals GreySpark

London - 21 March 2013

  • HFT often used as scapegoat for market cataclysms
  • Part one of two research reports on HFT examines the regulatory landscape around high-speed trading

Despite regulatory efforts to curb high-frequency trading (HFT), capital markets players will continue to rely on HFT and its use will continue to grow, reveals a new report published today by GreySpark Partners, a London-based capital markets consultancy. HFT systems will remain popular in competitive m arkets due to financial incentives and drivers of market efficiency support their use. These key findings are contained in the new research report, High-Frequency Trading: The Fast and the Furious.

The report, which is the first of two papers on HFT, explains how HFT is defined and perceived by the traded markets and by regulators, and it examines the growing regulatory landscape around automated trading systems. The report finds that, despite the increasingly complex regulatory landscape surrounding HFT, capital markets participants expect HFT systems to consume significantly larger volumes of electronificated asset classes by 2015. Crucially, all market participants surveyed agreed that, long term; financial regulators should act to make HFT safer as its use in global markets grows.

In producing this research, GreySpark has developed a clear overview of the growth of HFT as a result of market and technology innovations. The report also examines incidents when HFT systems were erroneously blamed for a variety of recent market incidents like the May 2012 ‘flash crash’ in US markets that helped create a skewed public perception of high-speed trading.

Jon Batty, a managing consultant in GreySpark’s Technology Consulting Practice, commented: “Advances in the speed and technical complexity of HFT systems designed to find liquid arbitrage opportunities are daunting to many market observers. As a result, the exact nature of HFT and how it differs from specialised algorithmic trading or general e-trading creates misunderstandings when negative market events occur, caricaturing public perception of HFT systems.”

Anna Pajor, senior consultant in GreySpark’s Capital Markets Intelligence Practice and lead author of the report, adds: “The capital markets industry hears stories about flash crashes and trading systems that cannot cope with the volume of orders or malfunctioning algorithms. Those stories prove that someone cut corners either when designing, implementing or testing HFT systems. We saw evidence of this, and we decided to tell the full story.”

High-Frequency Trading: The Fast and the Furious gives a clear overview of the actions that regulators in the EU, US and globally would like to take to minimise the perceived, undesirable effects of HFT. The GreySpark report separates these regulatory proposals from the legislative efforts to control HFT use that are still under way to provide a clear and detailed overview of all of the most relevant regulatory efforts that are underway, which could one day either help or hinder the proliferation of HFT systems. This regulatory review is broken down by country and by regulator, grading the severity of the impact each regulatory proposal would bring to the market.

The research finds that regulators will continue to attempt to limit bank and hedge fund efforts to develop market structures that favor HFT.

Part two will focus on HFT risk management protocols , and it will be available in early April.

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