The arms race of high frequency trading (HFT) is increasingly becoming a war of equals and the odds will move towards asset managers, according to Rob Boardman, CEO of ITG.
Speaking at TradeTech Europe 2014 in Paris, Boardman said many large brokers are offering low latency technology to buy-side firms through algorithms and smart routers, allowing them to approach the speed of HFT firms.
“A portion of European liquidity caused by HFT has actually dropped over the last five years,” Boardman said. “One of the causes of that, I believe, is brokers themselves have caught up in the technology.”
He said HFT firms will still see returns in the future, but “as the race becomes more equal the odds will move more towards the asset managers and away from the HFT firms”.
HFT has been under the spotlight after the release of broker-turned-author Michael Lewis’ new book, ‘Flash Boys,’ which depicts HFT as unfair and potentially illegal.
Lewis’ main criticism is that the techniques employed by HFT – and exchanges’ reliance on HFT business to support their revenues – means the stock market is rigged against the interests of both retail and institutional investors.
HFT is not only shaking confidence in the stock market, according to Lewis, but also damaging the returns of pension funds, while making a select few wealthy.
Boardman said the book was created to stir debate, but the data available didn’t draw a picture of rigged markets.
“Markets have become cheaper for investors both at the retail and institutional level,” he said. “I think there are some questions for the industry to ask, but I’m not quite sure that we should conclude that our industry is broken.”
Richard Semark, managing director equities, UBS, and CEO, UBS MTF, told delegates it was “absolutely crucial” for buy-side firms to understand how their brokers are treating HFT clients.
“If high frequency clients are using your [broker’s] pipes to access the market that’s one thing, but if brokers are giving them some preferential look at your institutional order flow, I think that’s a real problem,” he said.
Semark also emphasised it was important to ask for the same information from exchanges.
“My view of high frequency trading is fairly neutral, but what I do have a problem with is if they are getting preferential treatment, preferential data, and preferential latency so they have an advantage,” he said.
“I think it’s important that we are aware of what is taking place, although I think to be fair, it’s happening more in the US than it has been in Europe.”