The rise of a new era: high frequency trading

Words  High-frequency trading  with the financial data on the background.

An outbreak of panic struck the financial markets on May 6, 2010. The appearance of a new crisis that has never existed before. In the space of 10 minutes, the markets fell sharply without interruption and lost up to -9%, the lowest ever. This is called “Flash crash“. Even today, no one knows the exact reasons for this crisis. But for some, there is no doubt. The algorithmic trading to a share of responsibility. But first let’s go back to high-frequency trading.

It was in 2005 that it appeared when the United States began to implement algorithms to automate orders at full speed. Many people still think that to negotiate, it is still necessary to scream in the rooms and execute incomprehensible signs.

high frequency trading

But this era is over. From now on, the auction has given way to computers and their endless algorithms. Mathematicians are therefore putting in place new formulas that make it possible to take positions in the place of man. They therefore have control over most financial transactions. The new machines have no emotions and therefore make it possible not to be influenced by psychological biases.

Every day, high frequency trading brews billions of dollars worldwide with about 60% of the world’s daily transactions. To automate all this, powerful mathematical algorithms are coded and integrated into high-speed computers to detect and exploit micro-market movements.

Orders are executed in about ten milliseconds and therefore try to take advantage of very small price differences on the values. With such a speed of execution, one can wonder if this can not destabilize markets and it is legitimate to ask questions about regulation.

Is it necessary to regulate high frequency trading?

As high-frequency trading grows, the authorities quickly reacted. In particular the AMF which has carried out a risk mapping. It estimates that the volume of transactions processed by high-frequency trading for the CAC 40 is 17% and around 30% for Europe.

The debate is complex because among the many experts, there are two parties. Some say it is dangerous to use this system, and others point out that this trading is essential for market liquidity. However, the authorities have decided to limit the speed of transactions.

In fact, a draft revision of the Markets in Financial Instruments Directive intends to impose a time of minimum latency for stock market orders. That is, each automated order, before being executed, must remain at least half a second in the order books.

This new project is likely to have a significant impact on transaction volumes and market operators. Pending the response of the European Parliament and the adoption of a joint decision, the debate is very lively between detractors and defenders of high frequency trading.

Future “Flash crash” ?

On the other hand, the subject of high frequency trading leaves no one indifferent, one can wonder if the origin of the “flash crashes” is not partly due to high frequency trading. We are currently unable to find the factors that cause the “flash crash”, but according to experts, high frequency trading can amplify the drop.

We all know that high frequency trading is based on the principle of taking positions according to market trends. And it is clear that if the market is “bearish”, the machines will therefore massively return to the sale, which causes a mini crisis. The market is therefore extremely volatile, and the execution speed is so fast that even stop-losses are surpassed and do not have time to be triggered.

No one knows where and when the next crisis will appear but one thing is certain, it is that high frequency trading has already impacted the depth of the markets. That is to say that we see more and more small orders and the size of transactions have decreased. This results in an inability to absorb a large order size and the growth of OTC transactions.



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Bonds & Shares is a participatory non-Profit information platform for, through and by experts in finance and business.



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