Trading Technology

10:18 AM
Dev Tyagi, Supermicro UK
Dev Tyagi, Supermicro UK
Commentary
50%
50%

Don’t Let "Flash Boys" Throw the HFT Baby Out with the Bathwater

Whether it's "Flash Boys" or four years since the Flash Crash, regulators should not come down against HFT without examining the pros and cons, argues Dev Tyagi of Supermicro UK.

The release of ‘Flash Boys’ by Michael Lewis was always going fuel the ‘is HFT a good or bad thing for markets’ debate. But it is important to remember that there are two sides to every story. Since the May 2010 flash crash, where the Dow dropped over 900 points, HFT has been under the spotlight. The general view was that the event was closely related to the presence of high-speed traders in the market.

Dev Tyagi, Supermicro UK
Dev Tyagi, Supermicro UK

However, as we now know from the Securities and Exchange (SEC), the audit trail failed to prove that HFT was the cause. In fact since the crash, there has been growing evidence to suggest that high-speed trading has a positive effect on markets. In January, the European Central Bank (ECB) released a report claiming that that HFT drives price efficiency both on average and on the highest volatility days. High-speed traders have also dramatically reduced the cost of trading, which for some reason, seems to be overlooked by those who criticize the practice.

This is why, four years on from the flash crash, the market as a whole needs to approach new claims from Lewis that the stock market is ‘rigged’ by HFT with caution. Of course if anyone really is rigging the market it should be dealt with by the appropriate authorities but don’t blame the machine. While smarter oversight of the practice is required, it is important that regulators do not have a knee-jerk reaction to this book by implementing ill-thought out rules. Further proposals to regulate HFT, in addition to what has already been proposed from MiFID and the FTT, could significantly increase transaction costs for end-investors.

One thing we have learnt is that HFT firms have demonstrated their ability to change strategy as quickly as the markets move. Their likely response to further controls will be to move rapidly into new markets to drive more liquidity. We are already seeing certain HFT firms explore the possibilities of moving away from more established trading venues in favor of emerging markets. HFT firms are not only expanding their geographical reach, but also their strategies to help guard against any future regulatory risks they could face.

Given the current market dependence on the liquidity HFT provides, regulators must consider hard facts over commercial or political pressures when making decisions. It would be a pity for the benefits of HFT to be lost purely because of the negative light in which the practice has been cast in Flash Boys – a case, surely, of throwing the baby out with the bathwater.

—Dev Tyagi, General Manager at Supermicro UK, a provider of X86 technology architecture typically used by high-frequency traders.

 

Comment  | 
Print  | 
More Insights
More Commentary
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
The Mainframe Innovation Drag
It may be time for a consortium of firms motivated around the objective of eliminating the mainframe. What if every self-clearing firm decided to participate in building a modern, back-office system as an open-source, cloud-based project?
Big Data DIY
Now that we have passed the initial hype phase of big data, companies are searching for real business value from their investments. Consultants can play a part, but only if financial firms insist on a new partnership model.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.