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HIGH FREQUENCY TRADINGFINANCIAL MARKETS 2.0: A WHOLE NEW GAME
>>> >>>How? Build
>>> >>>Fragmentation increases complexity reduces transparency: markets become more opaque. Stock exchanges become for-profit, listed companies, competing with each other. Serving the real economy becomes a secondary purpose. Consequences: Speculative activity of nancial markets has grown tremendously. Ultra fast trading algorithms (robot traders) have replaced human traders. The system tends |to serve its own purposes. More betting. Less investing.
Stock exchanges help nancing THE REAL ECONOMY
TRUST by being FAIR, ORDERLY & TRANSPARENT.2006 WAVE OF LIBERALISATIONCalled MiFID (Europe) & Reg NMS (USA)
Privatisation Deregulation of Stock Exchanges Pre 2006 Regulated (40 venues)
2012 Deregulated (256 venues)
RISE IN HFT ACTIVITY
A whole new game : High Frequency Trading exploded in the last 10 years, accounting in 2012 for more than 53% of equity trading in the USA and 37% in the European Union.
37%Source: Tabb Group estimate
WHAT IS HFT?HFT is the use of sophisticated algorithms with the aim of trading securities (stock, derivatives, bonds) ever closer to the speed of light. It is currently revolutionizing how nancial markets work, the role of its operators and intermediaries as well as their impact on society.IT TAKES 350 MILLISECONDS TO BLINK HFT WIRING THE PLANET170 MILLISECONDSROUND TRIP
Chicago9MIP S TR D D ON UN SEC RO ILLI
LondonD TRIP ROUN CONDS ISE 60 MILL
IP ND TR NDS O LISEC
MI ND LL ISE TRI CO P ND S
Moscow Osaka Hong Kong65
IN THIS TIME 7000 HTF TRANSACTIONS ARE EXECUTED(It takes 5 microseconds to complete 1 order)
IP DS TR ON D N EC U LIS RO IL M
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Coming next? MICROWAVE TRADING
GAIN 21 MILLISECONDS (35% Faster) GAIN 1.6 BILLION POUNDSNEW YORKATLANTIC OCEANNEW TRADITIONAL WIRE
Cables NYC-London (0.3 bil US $) and London-Tokyo (1.5 bil US $) are under construction, yet new microwave technologies are already challenging their speed supremacy...
GAIN 5 MILLISECONDS
The speed of light limitation is getting annoyingAndrew Bach, New York Stock Exchange Not only is microsecond trading completely disconnected with the fundamental value of nancial instruments, we have now entered an ecosystem that is remote from the human brains capacities.
HOW LONG DOES IT TAKE TO PROCESS INFORMATION?it takes a chess grandmaster approximately 650 milliseconds just to realize that she is in trouble (i.e. her king is in checkmate). In many areas of human activity, the quickest that someone can notice such a cue and physically react, is approximately 1000 milliseconds (1 second)Source: seangourley.com
HUMAN DECISION ECOSYSTEM
650MSLIMIT OF HUMAN DECISION MAKING
NEW YORKER STORY SCIENTIFIC JOURNAL WASHINGTON POST ARTICLE
140 CHR TWEET
FASTEST TRADE TIME NASDAQ
TIME FOR LIGHT TO TRAVEL FROM NY TO LONDON (65MS)
FASTEST HARDWARE TRADE EXECUTION (740 NANOSECONDS)
WHAT IS THE PROBLEM?
DISORDERThe rst problem is related to technological instabilities. This new nancial ecosystem creates unprecedented disorder. For instance, no less than 18,520 ultrafast crashes occurred between 2006 and 2011 (10 per trading day)!
SOME TECHNICAL BUGS IN THE SYSTEM
Flash Crash - the very rst HFT crash. Loss: 200 mil $ (1 trillion $ disappear). 1st August 2012. Knight Capital loss: 440 mil $ 23rd March 2012 BATS IPO IPO Cancelled 18th May 2012 Facebook IPO 3h paralysis of quotation (NBBO)
As in any eld, new technology brings improvements, such as more transparency, lower costs through automation and better public access. Some of that has happened in nancial markets but has little to do with HFT. HFT as a predatory trading strategy involves taking this technology to an extreme in order to take advantage of slower, traditional traders. They are helped in this by the stock exchanges, which o er these high-end clients expensive, tailor-made services for the purpose.
DISTRUSTTraditional investors and corporations are increasingly leaving these markets and putting their money into bank deposits or bonds, for example. The reasons include macro-economic factors as well as concerns over the frequent crashes linked to speed and predatory or perceived abusive strategies by high-frequency traders. To illustrate: US domestic equity mutual funds, one of the largest pools of retail investor money, withdrew $538bn from stock markets between 2007 and 2012. In the same period, the number of listed companies in the US decreased by 44%.Source: Larry Tabb estimates in US
REGULATIONThe current lack of regulation threatens the very model of a nancial system that serves society. MiFID2 (2013) regulation could put the EU at the forefront of corrective measures! STAY TUNED! www.finance-watch.org