Derivatives

HFT helps stabilise the market during shocks - Eurex

High-frequency trading (HFT) provides stability to the market during crashes, according to Eurex data aimed at disproving buy-side "misconceptions".

Randolf Roth, head of market structure for Eurex, the derivatives exchange owned by Germany's Deutsche Börse, said the main HFT misconception was that firms only operated "in good weather".

"HFT firms contribute not only to liquidity but also help in severe situations to stabilise the market by continuing to run their algorithms the way they did before," he said. "That implies that they continue to provide liquidity on both sides."

As stocks plunged in response to the European sovereign debt crisis in August 2011, said Roth, about 200 trading participants acted as buyers in the falling market, including HFT traders, which absorbed major sell positions.

Speaking at a seminar in London, Roth said other data from periods of market volatility showed similar behaviour, while the assumed downward spiral in market values - driven by computer-based trading strategies - was not found.

HFT stabilises the market through its arbitrage strategies, he said. If there is a huge order imbalance in DAX futures, HFT firms will buy those futures and sell others based on other European indices, such as SMI and Eurostoxx, for example.

"Those contracts may fall, but only 1-2% - nothing major. More importantly, at the same time they stabilise the imbalanced market in DAX futures because they are the ones buying at the worst time."

Front running

Roth also said accusations of HFT front running trades were misleading.

"HFT firms have no upfront information about customer flow which they could use to front-run customers," he said, arguing that HFT firms simply observe customer orders, adjust their behaviour based on statistical models and make assumptions to identify order flow. He also suggested buy-side concerns over HFT were based on negative experiences in fragmented cash markets in which price levels move before the majority of a large order had been placed.

"There is this strong perception that if something bad happens to buy-side firms that must have been caused by HFT firms. These concerns could lead to a shift to use dark pools. In our view, that's not a good development," he said.

HFT exodus?

Eurex is bracing for regulation which will force financial institutions executing HFT in Germany to register with national regulator BaFin.

MiFID currently allows firms supervised by domestic regulators to operate in other European markets under 'passport' rules. However, many UK firms, for example, may not be eligible for the passport option as they are regulated only as 'local entities'.

As a result, UK firms will either have to register with BaFin, get a passport or set up a branch in Germany. Exemptions may only be granted case by case.

European firms will have a transitional period of six months to register for a licence when the bill is implemented, and firms outside of Europe will have nine months. 

Roth said it was too early to say whether the new rules would lead to a liquidity loss for Eurex.

Paloma Migone +44 (0) 20 7397 3815 paloma.migone@information-partners.com