Are high-frequency traders taking flight, hounded out of European and US equity markets by message charges, tougher scrutiny and a general air of suspicion? The witch hunt may be in full cry, but sometimes convincing evidence of a change in behaviour is slow to coalesce – even in the world of low-latency trading.
On 2 April, Borsa Italiana went ahead with a new pricing regime that imposes a sliding scale of additional charges on firms whose order-to-trade ratios exceed 100:1. The move followed a call by Italy’s financial regulator, Consob, for the London Stock Exchange-owned bourse to curb “excessive” traffic. Other European regulators are known to be considering similar charges.
Two weeks later, the new fee structure has had little discernable impact on executed order volumes in Milan. Nor is the picture clear at the message level. In the US, HFT Alert – a provider of trade monitoring software – claims to have identified a substantial drop – from 11.7 million to three million – in the average daily level of quotes that result in no actual trades, in the second two weeks of March. The implication being that high-frequency traders are scaling back activity in response to plans on both sides of the Atlantic to penalise inefficient strategies that send unnecessarily high levels of orders into the market that can potentially create a misleading cloud of liquidity that bursts and disperses on impact.
Other explanations for any drop-off in message traffic and order volume might include a decline in volatility and a tailing-off in overall market activity after a burst of trading in February spurred by positive macro-economic signals from the US and a comparative reduction in the flow of bad news from the euro-zone.
The impact of higher charges on high-frequency trading (HFT) firms will take longer to discern. While they may trade in microseconds, exponents of the dark art typically deal in months and even years when it comes to preparing their strategies for market. As well as assembling the technology and acquiring the server space at a suitably proximate location to exchange matching engines, back testing of strategies can take up to 18 months. Such is the attention to detail required before most HFT are unleashed, not to mention the cost of that underlying infrastructure, that many firms focus on a single market centre, rather than trying their luck simultaneously in suitable HFT-friendly markets. So while we should expect HFT firms to adapt their strategies to changing regulatory and market conditions, they’re considerably less likely to up sticks at the first sight of an angry mob.
Indeed, one can expect the HFT community to mount a rousing defence of their contribution to financial markets, not least at the TradeTech Europe HFT Focus Day taking place in London on 24 April.
Speaking to The TRADE ahead of the event, Peter van Kleef, managing director, Lakeview Capital Market Services, a Germany-based broker-dealer that services the low-latency trading community, cited lowering spreads, adding liquidity and decreasing arbitrage opportunities from differential pricing across regions and venues. “HFT is oil to the financial markets engine that makes the markets run more efficiently,” he said.
I can’t see unanimous support for that view next week, but look forward to gauging the response.