Regulators and policymakers should concentrate on underlying conflicts of interest when regulating high-frequency trading (HFT), as the New York Attorney General and Securities and Exchange Commission (SEC) indicate a greater focus on such market activity.
New York Attorney General Eric Schneiderman last week reiterated a desire to investigate HFT activity and said some practices that provide certain participants with faster access to markets and information could be illegal.
His comments were supported in part by the SEC, which said it would look at research produced by Schneiderman’s office as part of plans to conduct a holistic review of US market structure.
Matt Lyons, global trading manager for buy-side firm The Capital Group, said the increased attention on HFT with the Attorney General’s comments may be obfuscating key underlying issues, namely the conflicts of interest that arise due to some low-latency activity.
“Regulators should address the inherent conflicts of interest in the system when addressing a broad issue like HFT, such as the impact of exchange rebates on broker routing practices,” he said.
Lyons, whose firm has more than US$1.25 trillion in assets under management, added that firms classed as HFT provide the market with a valuable function for which the buy-side is content to pay.
“Electronic market making is a crucial element of the market and firms that take on risk even at low latency to make markets liquid should be rewarded,” Lyons said.
A key focus in Attorney General Schneiderman’s comments was that trading venues such as exchanges and alternative trading systems (ATSs) must provide transparent and, where necessary, equal levels of service to clients.
Richard Johnson, head of US quantitative electronic services for Societe Generale, told theTRADEnews.com any changes to rules governing low-latency trading activity would impact the buy-side through their brokers, who have learned in recent years to deal with predatory HFT firms.
“Brokers have tailored their algos to measure venue toxicity and outsmart HFT, and they will continue to do so as new rules are introduced,” he said. “However, based on the recent comments from Attorney General Schneiderman, it sounds like the greatest impact may be felt by exchanges and ATS operators.”
Johnson said the holistic approach indicated by the SEC to tackle this and other market structure issues facing participants would be the ideal way to address these concerns instead of implementing changes one at a time.
“The buy-side is very concerned about market quality and there are a number of other topics being discussed that affect market structure, such as maker-taker pricing, a trade-at rule for dark pool trading, market data fees, as well as exchange co-location,” he said.
Despite the predatory strategies used by some low-latency proprietary trading firms to game institutional investors, Jim Overdahl, partner at consultancy Delta Strategy Group, and former chief economist of the SEC, said the positive elements of HFT activity should not be played down.
“Automated trading firms, often called HFT firms, are not in competition with the buy-side. They offer useful services to the market in terms of liquidity provision and assisting in price discovery, knitting together the prices of related markets,” he said.
Overdahl represents a number of HFT firms through his role as spokesperson for the Futures Industry Association’s Principal Traders Group, and supported the idea of an evidence-based approach, championed by SEC chair Mary Jo White, in any US market structure review.
“Any new rules imposed by regulators should at a minimum preserve the benefits that automation and increased competition have delivered to end-users and should be based on evidence, rather than assertions which may not be entirely supported with facts,” he said.