Our privacy policy describes how Fidessa uses cookies on our website. If you continue using our website, you are consenting to our use of cookies. OK

Whilst my breath is still warm

Good to see that the HFT community is finally starting to educate the regulators and policymakers. As we all know, the debate hinges on whether these firms are really acting as electronic versions of traditional market makers and, if they are, whether they should be subject to some of the same formal market making obligations. In particular, regulators have been gnashing their teeth over the fact that such firms are free to replace their quotes as often, or as “frequently”, as they like. The regulators argue that all this activity creates substantial noise that clogs up data pipes and distorts the true picture of the real price of a stock. In their defence, the HFTers argue that they have the right to re-price their “product” just as often as market conditions dictate and that, anyway, they aren’t breaking any laws.

This prompted me to ask a friend about how all this worked in the good old days of manual markets and traditional market makers. In response to this question, he paused for thought and then replied that, in those days, your quote was valid “whilst your breath was still warm.” Basically, this was just a poetic way of saying that it all depended upon a bunch of factors – how fast markets were moving, the instrument in question, the client, and even the different nature of individual trading floors and exchanges. Seems like the regulators might struggle, then, to impose an absolute time frame for quote validity in today’s world as any level is destined to be wrong in most cases, most of the time. If they are determined to impose absolute limits, then why not do it the other way round, i.e. say that HFTers can pull their quotes just as often as they like but there is a certain minimum time period before they can resubmit a quote? This idea was put to me the other day and, whilst it sounds like a subtle change, it would seem to provide a fair and equitable solution to the problems of both the HFTers (namely having to trade on a bad or stale quote) and the trading community at large (noise and clogged data pipes).

Irrespective of the merits of this approach, solutions that are fair and equitable on all market participants should be the mantra of the regulators. This means divorcing themselves from the politicians and accepting that perhaps the best they can ever hope to achieve is a solution that leaves everyone equally unhappy.

Comments
2 Responses to “Whilst my breath is still warm”
  1. doug engmann says:

    There is a simpler way to deal with this issue. Allow those HFT firms that want colocation at an exchange to be required to make markets, like those of us who were manual market makers in the old days who had “time and place” advantage. Those who want to be the fastest by being the closest should have obligations-everyone else will be slower, but can send as many quotes as they want.

  2. Tim Izzo says:

    It seems that a min on the time an order must be in the market will be much more impactful than a penalty on time until you can resubmit an order if you pulled your last one quickly.

    Two points:

    Forcing HFTers to focus on downside (having an order out there for a ‘long’ interval) rather than lost potential (not being able to rejoin a market) will send a more powerful message.

    Furthermore, liquidity will likely be hit harder by the second scenario than the first. If regulation starts to cause liquidity deterioration consistently, I think you could see volume move away from these trade centers.

    Thank you

Leave a comment

Copyright © 2017 Fidessa group plc. All rights reserved.

The information contained within this website is provided for informational purposes only. Fidessa will use reasonable care to ensure that information is accurate at the time it is made available, and for the duration that it remains on the site. The information may be changed by Fidessa at any time without notice. We also reserve the right to close the website at any time. No representation or warranty, expressed or implied, is given on behalf of Fidessa or any of its respective directors, employees, agents, or advisers as to the accuracy or completeness of the information or opinions contained herein or its suitability for any purpose and, save in the case of fraud, all liability for direct, indirect, special, consequential or other loss or damages of whatever kind that may arise from use of the website is hereby excluded to the fullest extent permitted by law. Any decisions you make based on the information in this website are your sole responsibility and information on the website should not be relied upon in connection with any investment decision.

The copyright of this website belongs to Fidessa. All other intellectual property rights are reserved.

Fragulator® is a registered trademark of Fidessa group plc.

Reproduction or redistribution of this information is prohibited except with written permission from Fidessa.