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Still hacking away at HFT

Had a distinct sense of déjà vu at TradeTech in London last week. Seems like much of the debate and chatter was the same as it was last year – HFT, ill thought through regulation, etc. It struck me, though, that maybe the regulators should let the market decide what is good or bad for us rather than agonising over these issues on our behalf. Take HFT for example. Whilst different definitions abound, electronic market making has just as much right to exist as any other business model in today’s trading ecosystem. If you don’t want to trade with them, then the answer’s simple – don’t!

A number of new dark pools are emerging that are specifically geared around allowing institutions to find natural liquidity between themselves. BLINK from Cheuvreux is just the latest example, and let’s not forget LiquidNet that pioneered the whole concept of buy-side crossing in the first place. For folks that don’t want to trade in size (such as the retail punters) then the narrower bid/offer spreads offered by electronic market makers look attractive. This has become the model adopted by MTFs such a TOM and Equiduct, powered by Optiver and Knight/Citadel, respectively.

Taken to its extreme then, you might end up with a separation of trading, with institutions placing more and more of their liquidity into broker dark pools and crossing networks whilst the retail community interacts with the HFT guys. But the real point is that, in any industry, market forces will always mean that different suppliers will shape their offerings in order to service distinct customer segments with similar needs. With this in mind, maybe the regulators should stop meddling and simply ensure that the depth, type and longevity of liquidity available at a venue is made clear to anyone that wishes to play there. The alternative is an endless array of corrections and counter-corrections from the regulators, just like a golfer having a really bad day on the course of unintended consequences.

3 Responses to “Still hacking away at HFT”
  1. neil crammond says:

    Sadly I doubt whether HFT and ATS exist if dark pools become a serious % player ; as their costs will exceed their profits .
    With so many MTF we will be seeing MARKET ABUSE on the rise too ; as regulators cannot cope with this transition

  2. Jan says:

    I have two memories from TradeTech London that connects to your blog, both from speakers at the event:

    1. MiFID, transparency, fairness all sounds fair. But remember whatever it is, it is at least 70% politics involved.
    2. If a man from Portugal, a man from Spain and a Greek go to a pub, who pays the bill?
    -the Germans of course!

  3. Tim Quast says:

    Good view, Steve.

    In retail clothing, some people want the cachet, service, and quality of Saks or Ralph Lauren, and others want the economy of Marshall’s or TK Maxx. What if regulators, wanting to “perfect the mechanism” of free and open markets, decided that what defines “good value” for consumers of clothing is “best price”?

    In effect, anyone wanting clothing from Saks or Ralph Lauren would have a difficult time, and any retailer like that would be at a competitive disadvantage under rules defining good clothing as “the lowest-priced items.”

    Not everybody wants the lowest-priced items.

    But that’s what we have in equity markets. It’s beyond nonsensical; it’s absurd, and even borders on bizarre. Why would a sentient, intelligent species permit a tiny handful of their kind to define “value”?

    Welcome to global equity markets. Reminds me of a great line from an obscure but terrific movie called “Thank You for Smoking” – a pinnacle achievement in satire. The member of the US Congress played by William H Macy is trying to eliminate cigarettes from all old pictures of Hollywood stars. He nods earnestly as he says: “We’re not changing history. We’re improving it.”

    That’s the kind of idiocy that arises when a populace permits bureaus and commissions to define how people interact with each other commercially.

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