HIGH FREQUENCY

TRADING

www.finance-watch.org

1%

EU

USA

2005 2012

21%

37%

53%

IT TAKES 350 MILLISECONDS TO BLINK

IN THIS TIME 7000 HTF TRANSACTIONS ARE EXECUTED

$££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ € $££ $ ¥ € £ $ ¥ €

(It takes 5 microseconds to complete 1 order)

Coming next? MICROWAVE TRADING

GAIN 21 MILLISECONDS (35% Faster)

GAIN 1.6 BILLION POUNDS

ATLANTIC OCEANNEW YORK LONDON

Chicago

NYC

London Moscow

Dubai

Singapore

ROUND TRIP

9 MILLISECONDS

ROUND TRIP 60 MILLISECONDS

ROUND TRIP

40 MILLISECONDS

ROUND TRIP

125 MILLISECONDS

ROUND TRIP

65 MILLISECONDS

HFT – WIRING THE PLANET

UNDER CONSTRUCTION

2006 – WAVE OF LIBERALISATIONCalled MiFID (Europe) & Reg NMS (USA)

Privatisation – Deregulation of Stock Exchanges

Pre 2006 – Regulated (40 venues)

2012 – Deregulated (256 venues)

DISORDER

SOME TECHNICAL BUGS IN THE SYSTEM

WHAT IS HFT?

WHAT IS THE PROBLEM?

Flash Crash - the very first 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)

FINANCIAL MARKETS 2.0: A WHOLE NEW GAME

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 financial 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.

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.

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...

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 financial markets

work, the role of its operators and intermediaries as well as their impact on society.

Not only is microsecond trading completely disconnected with the fundamental value of financial instruments, we have now entered an

ecosystem that is remote from the human brain’s capacities.

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)

The first problem is related to technological instabilities. This new financial ecosystem creates unprecedented disorder. For instance, no less than 18,520

ultrafast crashes occurred between 2006 and 2011 (10 per trading day)!

UNFAIRNESS

RISE IN HFT ACTIVITY

FAIR, ORDERLY & TRANSPARENT. by being…TRUSTHow? Build

Stock exchanges help financing THE REAL ECONOMY

NEW TRADITIONAL WIREGAIN 5 MILLISECONDS

Andrew Bach, New York Stock Exchange

Source: seangourley.com

“The speed of light limitation is getting annoying”

3HRS 1HRS 10MINS 1MINS 3SECS 650MS 1MS 1x10-6S 1x10-9

S

HUMAN DECISIONECOSYSTEM

ALGORITHMICECOSYSTEM

LIM

IT O

F H

UMAN

DEC

ISIO

N M

AKIN

G

SCIENTIFICJOURNAL

WASHINGTONPOST ARTICLE

NEW YORKERSTORY

TIME FORLIGHT TO

TRAVEL FROMNY TO LONDON

(65MS)

FASTEST HARDWARETRADE EXECUTION

(740 NANOSECONDS)

FASTESTTRADE TIME

NASDAQ140 CHRTWEET

HOW LONG DOES IT TAKE TO PROCESS INFORMATION?

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%.

The current lack of regulation threatens the very model of a financial system that serves society. MiFID2 (2013) regulation

could put the EU at the forefront of corrective measures!STAY TUNED!

REGULATIONO%

NEAR

>>> >>>

>>>>>>

Source: Tabb Group estimate

Source: Larry Tabb estimates in US

As in any field, new technology brings improvements, such as more transparency, lower costs through automation and better public access. Some of that has happened in financial 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.

ROUND TRIP 170 MILLISECONDS

ROUND TRIP 80 MILLISECONDS

ROUND TRIP 80 MILLISECONDS

USA >< JAPAN

Hong KongOsaka Tokyo