Split-second deals pose risk for market, players say

Discussion in 'Wall St. News' started by THE-BEAKER, Oct 12, 2009.

  1. Split-second deals pose risk for market, players say
    Ian King, Deputy Business Editor

    High-frequency trading (HFT), the split-second stock trading strategy that has exploded in popularity this year, could pose a risk to the market, according to a poll of industry participants.

    HFT, whereby shares can be bought or sold within a 2,000th of a second, has mushroomed during the past 18 months as traders seek to exploit improvements in technology.

    However, with high-frequency traders believed to account for more than half the activity on the New York Stock Exchange, there is concern that financial watchdogs have not properly assessed the effect that the strategy may have.

    An interactive poll of more than 100 high-frequency traders carried out last week on behalf of Thomson Reuters, the trading systems and financial data provider, found that 63 per cent of respondents believed that high-frequency trading could “potentially pose a risk to the market”. Twenty-seven per cent of those questioned said that HFT would “probably” pose a risk to the market, while 10 per cent went so far as to say that it would eventually be the cause of a market crash.
    Related Links

    * Hedge heroines outdo men in City

    * Ten share tips back from the brink

    Seventy per cent of those questioned said that high-frequency trading “could become a problem” for fund managers — with 30 per cent saying that it could prove to be a “major problem”.

    No less than 96 per cent of respondents said that regulators were not “fully up to speed” with implications of HFT.

    High-frequency traders use computer algorithms to analyse “buy” orders placed on the electronic order books of stock exchanges to assess the likely impact of those orders on share prices.

    The high-frequency trader then buys the stock involved and, a millisecond later, offers it on to the investor who placed the original order on the order book, making a minute profit on every transaction. In some instances, HTF programmes can sell stock.

    In America, the US Securities and Exchange Commission is looking into HFT amid concerns that such traders enjoy an unfair advantage over ordinary stock market investors. It is also investigating suggestions that HFT has helped to intensify the volatility in stock markets during the past year.

    In Britain, the Financial Services Authority is also looking into HFT, with talks said to have been opened with a number of investment banks and hedge funds.

    However, HFT has its defenders, with many participants arguing that the practice helps to improve liquidity — the ease with which an asset can be bought or sold — in the market. In the Thomson Reuters survey, 70 per cent of respondents said that HFT had led to extra liquidity.

    Rich Brown, the global business manager of machine readable news for Thomson Reuters, said: “The trading landscape has changed dramatically and become far more competitive as a growing number of participants implement [HFT] strategies with substantial capital at their disposal.

    “The poll indicates that, despite recent controversy around high-frequency trading and the large profits made by some firms, it does have positive implications for the market — primarily by providing additional liquidity.”

    The growth in popularity of HFT has also created what some observers have described as a “technology arms race” among stock exchanges. The need to be able to cope with the increased number of “buy” or “sell” requests posted by traders on order books means that exchanges need better technology if they are to be able to compete effectively on a global playing field.

    Last month the London Stock Exchange paid £18 million for Millennium IT, a Sri Lankan technology services company, as part of its drive to increase capacity and attract more business to its trading platform. Nasdaq OMX and NYSE Euronext, two of the LSE’s biggest rivals, are working hard to update their trading systems’ capacity to cope with HFT’s popularity.

  2. when it is all said and done, the overall direction of the market will change little. The little scalpers as on ET will give their money to others, as always. The day/position trader who is profitable should be little impacted.

    Anything that improves liquidity it a good thing. More volatility that increases price swings may be good for traders. Obviously, they should eliminate those who get any advance access/notice of pricing. But I highly doubt that a company who gets in a few milliseconds faster will hurt Mr. 401K investor.