The ghost in the exchange

When Liquidnet invited me to a screening of an independent film about high-frequency trading (HFT) in London last week I wasn't quite sure what to expect.

Having recently been enthralled by several major summer blockbusters I wasn't really expecting the film, Ghost Exchange, to hold my attention in the same way as I grabbed my popcorn and took a seat, but I couldn't have been more wrong.

Ghost Exchange, produced, written and directed by Camilla Sullivan, is an entertaining, thought provoking and accessible look at how global markets and trading methods have developed in the last decade.

Featuring commentary from many of the industry's biggest names, the film paints a picture of a market that has enthusiastically adopted new technology without always fully understanding its implications.

It tells a story of brokers increasingly under pressure to cut costs introducing more and more technology into their daily operations. As the technology has improved, markets are able to trade faster and more efficiently than ever before, but this has had profound consequences on the way we trade.

While the old-style trading floor - which most members of the public still incorrectly believe to be the core of market trading - was often a frantic place, by today's standards it was operating at a snail's pace. In the modern market, computers dealing in microseconds reign supreme.

It is these black boxes that replaced the role of the traditional trader, which the film derives its name from. The unexpected 'flash crashes' and other phenomena associated with algorithmic trading prompting thoughts of a "ghost" in the machine. Of a computerised market structure so complex it is no longer under the full control of its human creators.

The film's stars, which include Vanguard Group's Gus Sauter, Joe Saluzzi of Themis Trading and of course, Liquidnet's own Seth Merrin, convey a story of rapid, almost bewildering, change over the past decade and are not afraid to criticise some of the new norms or admit that even the market veterans struggle to understand modern-day complexity.

Regulation is also considered, with a consensus that regulation itself is not bad for the market, but the wrong regulation could be catastrophic. There is also a surprising amount of sympathy with the plight of regulators, which are faced with the unenviable task of aggregating and understanding the vast quantities of data that is created from trades that can happen thousands of times per second.

Particularly noteworthy are complaints that the funding available to regulators represents just a tiny fraction of the budgets of the businesses they are trying to police. If major banks and brokers are struggling to get grips with all this data, how on Earth are regulators to cope on a shoestring budget?

Public interest  

It would have been easy for Sullivan to get bogged down in the details of capital markets and industry jargon, but instead the film could have a major role to play in educating the public on the role that markets play, as well as the problems they face.

This is perhaps its most important achievement. While debating the intricacies of regulation and dealing with the growing complexity of data and trading algorithms, it can be easy to forget the fundamental role of markets and how they can help, or hinder, the lives of people everywhere.

The markets are supposed to bring capital and business together for mutual benefit. The factory worker's pension helps fund businesses which drive economic growth, in turn returning dividends and capital growth to help that worker eventually retire. It seems that somewhere, aspects of the market have ceased to serve this function and public disillusionment has grown.

To counter this feeling of unease among the general populous, films such as Ghost Exchange have an important role to play, both in communicating what markets do for the wider economy and also highlighting their flaws.

Most market participants would agree that "good" regulation from a well-informed and well-funded regulator is needed. One way of achieving this is ensuring that voters understand it, so they can put pressure on politicians to get it right, for the benefit of everyone.