High Frequency Trading, over the past 30 years, have grown from being the latest fad to hit global markets into a significant part of daily activity in electronic markets around the world. And while critics say High-Frequency Trading has contributed to a number of recent hair-raising flash crashes, hedge funds and banks are increasingly looking to HFT as a driver for liquidity in an increasingly complex world of interconnected asset classes.
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The fundamental driver for the growing popularity of HFT systems among hedge funds and banks is a market environment that incentivises the provision of liquidity as the financial products across a number of asset classes become more complex. Advances in the speed and technical complexity of HFT systems designed to find arbitrage opportunities are daunting to many market observers. As a result, the exact nature of HFT and how it differs from specialised algorithmic trading or general electronic trading creates misunderstandings when negative market events occur, caricaturing public perception of HFT systems.
US markets were thrown into turmoil on May 6, 2010 when the Dow Jones Industrial Average plunged 1,000 points in just 16 minutes in an event that has since become known in the popular lexicon as a ‘flash crash’. Fingers of blame were immediately pointed toward the prevalence of HFT computer systems in the market, which banks and hedge funds injected with digital steroids in recent years in an effort to compete for market making or arbitrage. Since then, the myth of HFT has made the technology a virtual bogey-man for politicians and their regulatory counterparts as well as for market observers and market participants.
Part one – High-Frequency Trading: The Fast and the Furious – explores how, despite regulatory efforts to curb the trend, HFT and low latency trading will continue to grow in popularity. HFT systems will continue to grow in popularity because of the financial incentives and drives for efficiency in markets supporting their use. We see that the overall development of trading technology and the resulting electronification of markets are more important drivers for the growing use of HFT use than the regulations.
In part two – High-Frequency Trading: The Good, the Bad and the Ugly – risk controls for HFT are highlighted as essential elements of e-trading. Within HFT, implementation of risk management techniques becomes increasingly important as the complexity of the systems becomes more sophisticated. As such, a holistic approach to HFT risk management in key markets is needed.
About the Research
The research is based on our hands-on experience, working with Tier I and Tier II banks, hedge funds and leading vendors. The analysis of market trends is based on a survey of more than 50 industry participants from Africa, Asia, Asia-Pacific, Europe, the Middle East, North America and South America.