Delicate courting of HFT drives growth
As the Warsaw Stock Exchange (WSE) upgrades its trading infrastructure, Dariusz Kułakowski, general director for technology, believes careful expansion of high-speed trading is key to the venue's long-term success.
The exchange this week set a date to migrate to a new exchange system NYSE Euronext's Universal Trading Platform (UTP), which will boost the venue's message traffic capabilities from around 300 per second to 20,000.
The WSE will shift to the new system on 15 April after initial success of functional and technical acceptance tests. The UTP is the system that underpins NYSE Euronext's cash and derivatives markets in the US and Europe.
While the perils of high-frequency trading (HFT) strategies may be a cause for concern for some market participants, the subsequent liquidity boost will likely expand exchange volumes.
"The new technology will provide WSE with the flexibility to accommodate any investor interested in sophisticated algorithmic trading, including HFT strategies. This creates an opportunity for more liquid and safer trading for all participants, resulting in lower spreads, higher market quality and lower effective transaction costs," Kułakowski said.
The exchange's technology chief added that the WSE was past due to migrate to a system offering greater support for electronic trading.
"The technical parameters of the current system make HFT unviable, and HFT participants are absent from trading at the WSE. We intend to attract HFT in such fashion that it benefits the overall liquidity, but is not a deterring factor to other market participants," he said.
But while some market participants continue to reflect on the positive and negative impact of HFT strategies, some of which can lead to gaming of institutional orders, policymakers in Europe have already moved to address the growth of HFT.
MiFID II, which is currently being debated by the Council of the European Union, may apply levies on HFT trading such as order-to-trade ratios, a ban on maker-taker pricing models and even a minimum resting time for orders - all of which could significantly dampen the attractiveness of HFT strategies. A proposed financial transaction tax (FTT) backed by 11 EU member states could also increase downward pressures on venues and market participants alike.
"In our opinion two major regulatory issues which may shape electronic trading in Europe in near future are FTTs and potential HFT regulations," Kułakowski said.
Another tactic the exchange has pursued in recent years is the extension of market trading hours.
The exchange extended its afternoon trading by one hour in January 2011 to match closing times in London and Frankfurt. In the year after this extension the venue saw an 18% bump in volumes, but Kułakowski isn't convinced this was due to the longer opening.
As such, the WSE has undertaken a review of this strategy to see if, and by how much, extending trading hours has affected volumes.
The research, conducted by an independent market structure consultancy, is due later this month and will govern a decision to again adjust trading hours with input from the brokerage community.
"We feel that exchanges are moving towards more accessibility for the widest possible group of participants. That also means increased availability of trading throughout the day in order to accommodate investors that choose to respond to any type of market-moving data in an after-hours environment," Kułakowski said.