High Frequency Trading: Where are we with that?

High Frequency Trading or HFT is a method that allows you to detect micro trends in the markets by analyzing as much data as possible. Based on the analysis of these market trends, trading algorithms place buy or sell orders within a few nanoseconds.

high frequency trading

HFT now dominates the US market with 80% of transactions being electronic, and this practice is growing worldwide. So what about the regulation around HFT? Should we ask ourselves questions about our morality? Does it represent a danger to financial markets?

A danger to the markets is a certainty. In 2015, an HFT specialist was arrested in London for Fraud and Manipulation in the electronic futures market. Among other things, he is accused of having provoked the “Flash Crack” of May 2010 in the United States.

Remember, on May 6, 2010, the Dow Jones Index lost more than 600 points in 5 minutes. He is suspected of having used an overlay strategy by placing a multitude of high-impact orders at different prices, thus creating the illusion of a very active market and then removing them. Thus these orders misled other traders and he could take advantage of the rise or fall.

Another widespread strategy is a strategy using Iceberg orders, these orders make it possible to split a very large order into small, tiny orders, so these orders attract less attention, prices increase less and they pay less.

But this HFT specialist is not the only one to have been convicted, the American Virtu was fined by the AMF 5 million euros for manipulating the prices of 27 CAC 40 stocks during 32 sessions in 2009.

Despite all its sanctions, opinions diverge and even within the AMF. At the end of January 2017, the Autorité des Marchés Financiers published a study on the activity of the main HFT players between November 2015 and July 2016, looking at their presence in the order book and the volumes that were processed.

In conclusion, HFT players represent 80% of the quantity present at the 3 best limits of the book and “they consume more liquidity than they provide and withdraw before announcements, unlike other market participants”, the AMF said. However, it also added that “Market-making (non-directional) strategies avoid sudden price movements; the withdrawal of HFTs in the seconds preceding a planned announcement is therefore rational behaviour”.

Other opinions are much more clear-cut, such as Jean-Louis Bancel’s, who said “we must simply ban HFT, it is eminently dangerous and strongly disrupts markets”.

The problem is that the rules differ from one country to another, making it difficult to impose regulation at the international level. However, Brussels has decided to regulate HFT’s activity. Through MIF II, by defining from 2018 the category of HFTs (any trading company that sends at least 2 messages per second). This category will require approval and in some cases will have to be part of programmes defined by the market operator. This work will facilitate the work of national regulators in particular.

Despite this regulation, trading is developing very quickly and increasing its market share, as in Russia where it is 36% of shares and in Brazil 21%. Larry Tabb, founder of an American research and consulting firm, says, “HFT will replace traditional trading models.

This will happen all over the world, even in the most illiquid markets. So we cannot ignore it, but HFT will spread everywhere and become even bigger. Even more recent news proves it, Blackrock, the global asset management giant, will send back between 30 and 40 active management professionals to be able to transform some of its funds into quantitative investment strategies based on algorithms.

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Nicolas Viguier


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