HIGH
FREQUENCY
TRADING
FINANCIAL MARKETS 2.0: A WHOLE NEW GAME
>>>
>>>
>>>
>>>
Stock exchanges help financing THE REAL ECONOMY
TRUST by being…
FAIR, ORDERLY & TRANSPARENT.
How? Build
2006 – WAVE OF LIBERALISATION
Called MiFID (Europe) & Reg NMS (USA)
Privatisation – Deregulation of Stock Exchanges
Pre 2006 – Regulated (40 venues)
2012 – Deregulated (256 venues)
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.
RISE IN HFT ACTIVITY
2012
21%
53%
1%
37%
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.
EU
USA
2005
Source: Tabb Group estimate
WHAT IS HFT?
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.
IT TAKES 350 MILLISECONDS TO BLINK
HFT – WIRING THE PLANET
ROUND TRIP
170 MILLISECONDS
Chicago
London
IP S
TR D
D ON
UN SEC
RO ILLI
9M
< JAPAN
ROUND TRIP
NYC
IP
ND TR NDS
O
LISEC
ROU
40 MIL
125 ROU
Moscow
MI ND
LL
ISE TRI
CO P
ND
S
D TRIP
ROUN CONDS
ISE
60 MILL
80 MILLISECONDS
Osaka
Hong Kong
IP DS
TR ON
D
N EC
U LIS
RO IL
M
Dubai
IN THIS TIME 7000 HTF
TRANSACTIONS ARE EXECUTED
Tokyo
USA >
ROUND TRIP
80 MILLISECONDS
65
Singapore
(It takes 5 microseconds to complete 1 order)
£
$
¥
£
$
¥
£
$
€
€
££
$$
¥¥
££
$$
¥¥
££
$$
€€
€€
£
$
¥
£
$
¥
£
$
€
€
££
$$
¥¥
££
$$
¥¥
££
$$
€€
€€
££
$$
¥¥
££
$$
¥¥
££
$$
€€
€€
£
$
¥
£
$
¥
£
$
€
€
£
$
¥
£
$
¥
£
$
€
€
UNDER CONSTRUCTION
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...
Coming next? MICROWAVE TRADING
GAIN 21 MILLISECONDS (35% Faster)
GAIN 1.6 BILLION POUNDS
ATLANTIC OCEAN
NEW YORK
LONDON
NEW TRADITIONAL WIRE
GAIN 5 MILLISECONDS
“The speed of light limitation
is getting annoying”
Andrew Bach, New York Stock Exchange
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.
HOW LONG DOES IT TAKE TO PROCESS INFORMATION?
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)
Source: seangourley.com
HUMAN DECISION
ECOSYSTEM
1HRS
10MINS
1MINS
3SECS
NEW YORKER
STORY
SCIENTIFIC
JOURNAL
650MS
140 CHR
TWEET
WASHINGTON
POST ARTICLE
LIMIT OF HUMAN DECISION MAKING
3HRS
ALGORITHMIC
ECOSYSTEM
1MS
1x10-6S
1x10-9S
FASTEST
TRADE TIME
NASDAQ
TIME FOR
LIGHT TO
TRAVEL FROM
NY TO LONDON
(65MS)
FASTEST HARDWARE
TRADE EXECUTION
(740 NANOSECONDS)
WHAT IS THE PROBLEM?
DISORDER
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)!
SOME TECHNICAL BUGS IN THE SYSTEM
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)
UNFAIRNESS
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 offer these
high-end clients expensive, tailor-made services for the purpose.
DISTRUST
Traditional 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%.
Source: Larry Tabb estimates in US
NEAR
O
%
REGULATION
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!
www.finance-watch.org