Stock prices, stock index futures, options and exchange traded funds ETFs experienced wild volatility and trading volumes spiked. Despite the backlash, seasoned academics, regulators and sophisticated investors quibble with this assertion.
However, with much talk in Washington DC about market volatility after the meme stock episodes of spring roiled markets, in comments on several occasions new SEC chair, Gary Gensler, has noted that market structure issues including payment for order flow PFOF is an area that he wants the regulator to explore possible new rules.
Several assertions have marked the HFT space since its height, some unfairly because of backlash, according to a specialist in the space. People get upset that they think that HFTs have special access that they can never get.
It might be a situation where, certainly a mom and pop investor won't be able to pay for the high-speed access or the high capacity access themselves. See also: Bumps in the road and IEX on the record. Bauguess said claims that retail investors are harmed by HFT remains unclear, but that an SEC plan to study market structure effects, the Transaction Fee Pilot , was approved but then scuttled after being challenged in court. Other assertions are that HFT firms, in fact, do not supply liquidity to markets but remove it.
Another claim is that the purported liquidity brought about by HFT is, actually, fleeting. These days HFT firms prefer to not carry that name, opting instead for titles including liquidity provider, systematic trader and electronic market maker. One such large liquidity provider, who spoke anonymously to IFLR , bristled at the idea that HFT firms in fact rob the market of the vital liquidity needed for price discovery and markets optimisation.
In this way, HFT firms as market makers lower transaction costs across markets, the liquidity provider source said. In the first decade of the s, armed with degrees from top universities, ambitious, aspiring Wall Street climbers flocked to HFT to open their own firms. These heady days at the height of HFT fervour led to the incredible growth of some small shops but also to the dominance of now massive and highly profitable firms.
Increased numbers of firms and new entrants like financial technology fintech vendors entering the market broadening access brought competition and eventually consolidation, Malan said. Now, the firms that remain have become some of the biggest market makers.
The technology was acquired by the bigger firms, so now the bigger firms are all very well known market makers like Citadel and Jump.
HFT strategies have also been broadened out of equities to more asset classes including foreign exchange FX , ETFs and from new corners of the market such as commodities trading advisors, she added. This was a revolutionary — but widely anticipated — development, as the number of trading venues proliferated and the amount and speed of market data increased almost logarithmically. Trading today creates daily torrents of data in the range of 15 million to 20 million messages a second. And while the majority of that data is for US options, the data created in the equities market can easily reach 5 million messages per second.
The key to running an equities business is to quickly consume this information, analyze it, and use it to power trading decisions — and to do it quickly. Otherwise, the liquidity you are searching for could be snagged by someone else. To accomplish this, one needs a flexible infrastructure, capable of trading at minimal latencies measured in the high nanoseconds billionths of a second. There are many aspects of this business with which the managing director of global equities technology at Credit Suisse needs to be concerned.
First, how to capture that information efficiently, effectively, and expeditiously. Second, how to leverage new data management technologies such as in-memory storage.
And third, how best to analyze the data once it is captured. Tudoran recalled an anecdote about how Credit Suisse implemented micro-tactics to transform algo decision-making from a centralized command-and-control structure, in which a central hub guides all execution transactions, to a distributed model that gives semi-autonomous execution engines co-located at the various exchanges increasing control, while the central hub coordinates the overall macro strategy.
While this type of high-speed technology moves too quickly for it to be implemented within a cloud structure, according to Tudoran, she was quick to point out that cloud technologies are becoming an increasingly important aspect of capital markets technology. The ability for the cloud to store, back-test and analyze data is unparalleled and will be a critical aspect of the business, she said.
In addition, AI and machine learning technologies will leverage cloud infrastructure and cloud-stored data to help instruct, target, and tune not only trading algorithms but also many core services that are provided by banks and investment managers.
The last, but certainly not least important, aspect of the business we discussed was governance and compliance. Reiterating her belief that technology would help move the industry forward, and that data and analytics were going to be a critical aspect of the business, Tudoran discussed the inevitable and increasingly important role that technology plays in compliance and governance.
The role of governance in our markets is more important than ever.
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