The High Frequency Trading. The Gold Rush?

Financial Graph. Stock Market chart. Forex Investment Business Internet Technology concept

The human or animal side of trading rooms remained paramount in the trading world. Nowadays, IT and mathematics are omnipresent in the front office. In this war against time, some market players are increasingly denouncing a real “arms race”, making it impossible for small players to intervene and thus creating distortions of competition.

The Hight frequency trader or high frequency trading uses powerful computers including algorithms to select and operate minute market movements with an order of time close to one millisecond. We can have up to 1000 executions per second.

The aim being to take advantage of very small price differences on securities system values, it is a form of scalping. This form of trading, which has developed strongly in recent years, is generating a great deal of interest, as is the case for Goldman Sachs, which no longer has a trader in New York, but also a lot of questions for managers, investors and, above all, the AMF. Indeed, it is difficult for the AMF to establish this ratio because not all HF traders are market members and the AMF has direct access only to the identity of the market members responsible for orders and transactions, not end customers.

The debate is great around this apparent form of trading. Some believe that it provides liquidity via market-making and arbitrage as well as a certain market efficiency through a balance of prices between the market and related values.
Denouncers denounce a “ghost” liquidity, the permanent instability of the order book would introduce a structural uncertainty into trading (an order is already obsolete at the time it is sent) that is an obstacle to efficiency.

high frequency trading

Scheme : Source AMF

In addition, market authorities are starting to raise their voices. For example, the AMF recently reported a damning report on this type of trading, denouncing in particular the threats of “market integrity” when trading strategies are diverted from their original purpose and used for market manipulation purposes. 

We now note the appearance in recent years of a system similar to high frequency trading: Robots advisors.

From FinTech (Financial Technology), supported by the AMF and ACPR, it marks a break for individuals regarding their investments and advisors.

Note that robots are already well established in market finance as stated above. For market finance players, these robots are an undeniable reality taking full part in the digital era (BigData).

The banks have therefore opened this possibility to retail investors in order to retain unprofitable customers at a lower cost, attract new customers via an automated and fluidized delegation of transactions through these robots and their algorithms.

The possibilities are numerous for portfolio management, market definition and risk profile allow to let the robot free to process orders automatically. Who will then be held responsible for mismanagement, loss of capital or poor arbitration. The bank, the quant or the investor? of many questions remains present concerning these attractive robots, eager for profit but even more so most inefficient on fraudulent sites.

In short, robots allow financial players to trade at high frequency, allowing automatic execution on thousands of orders on a daily basis, but they require constant vigilance and highly qualified people in mathematics and IT to push the limits of finance a little further each day. This system was an opening to Fintech and a development of the banking and financial offer for individual investors through robots able to manage a portfolio of assets in purchase/sale in an algorithmic way.

Alexandre CAMPOS

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