Trading Technology

09:33 AM
Steve Grob
Steve Grob
Commentary
50%
50%

A Time-Out for HFT

If high frequency traders can submit quotes and pull them out in an instant, why not set a time limit before they can resubmit a new quote?

Good to see that the HFT community is finally starting to educate the regulators and policymakers. As we all know, the debate hinges on whether these firms are really acting as electronic versions of traditional market makers and, if they are, whether they should be subject to some of the same formal market making obligations. In particular, regulators have been gnashing their teeth over the fact that such firms are free to replace their quotes as often, or as "frequently," as they like. The regulators argue that all this activity creates substantial noise that clogs up data pipes and distorts the true picture of the real price of a stock. In their defense, the HFTers argue that they have the right to re-price their "product" just as often as market conditions dictate and that, anyway, they aren't breaking any laws.

This prompted me to ask a friend about how all this worked in the good old days of manual markets and traditional market makers. In response to this question, he paused for thought and then replied that, in those days, your quote was valid "whilst your breath was still warm."

Basically, this was just a poetic way of saying that it all depended upon a bunch of factors -- how fast markets were moving, the instrument in question, the client, and even the different nature of individual trading floors and exchanges. Seems like the regulators might struggle, then, to impose an absolute time frame for quote validity in today's world as any level is destined to be wrong in most cases, most of the time. If they are determined to impose absolute limits, then why not do it the other way round?

In short, say that HFTers can pull their quotes just as often as they like but there is a certain minimum time period before they can resubmit a quote?

This idea was put to me the other day and, whilst it sounds like a subtle change, it would seem to provide a fair and equitable solution to the problems of both the HFTers (namely having to trade on a bad or stale quote) and the trading community at large (noise and clogged data pipes).

Irrespective of the merits of this approach, solutions that are fair and equitable on all market participants should be the mantra of the regulators. This means divorcing themselves from the politicians and accepting that perhaps the best they can ever hope to achieve is a solution that leaves everyone equally unhappy.

Steve Grob is director at Fidessa and he regularly writes for the firm's Fragmentation blog.

Comment  | 
Print  | 
More Insights
More Commentary
Shared Reporting Services on the Horizon, Genpact Predicts
The financial services industry is starting to adopt shared services, resulting in reasonable impacts to the bottom line. Genpact expects a push for reporting efficiency will come next.
Don't Let the Cloud Rain on Your Operations Strategy Parade
Avoid migrating large applications all at once to minimize risk during a cloud project.
Could Intel Lose Data Center Market Share to ARM Chips?
ARM chips could be an alternative for certain purposes in the datacenter, but many questions have to be answered before they pose a threat to Intel's market dominance.
Cost to Trade: Hey, Banks, Itís Time to Face the Music
Why is calculating the cost to trade so difficult for banks? The answer is as complex as the calculations themselves.
M&A Activity Will Continue to Grow in 2015
Data shows that the M&A market continues to improve, and forecasts indicate deal making will be healthy in 2015.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
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.