High-frequency trading (HFT) has become an important component of financial markets and, despite widespread criticism, it can be a stabilizing factor during market stress events, according to a group of senior exchange officials.
Speaking at the Futures Industry Association’s International Derivatives Expo in London on Tuesday, the chief executives of several global exchanges hit back at the media frenzy that has engulfed HFT in recent weeks, after the publication of Michael Lewis’s HFT exposé Flash Boys.
“There is a whole host of empirical data to prove that in fast market situations, HFT is actually the stabilizing factor that contributes to balanced order books with decent size, and the ones that leave the market in fast market situations are the non-HFT traders,” said Andreas Preuss, chief executive of German derivatives exchange Eurex.
“We need to be clearer about getting this message out to a wider audience.”
HFT was mired in controversy even before the publication of Flash Boys, which accuses HFTs of rigging markets. In FX, the rise of HFT in recent years has prompted frustration among leading banks that their ability to manage risk on platforms has been compromised by speedy, tech-savvy traders.
Author Michael Lewis gestures during an interview regarding his book about high-frequency trading (HFT) titled Flash Boys
Some FX platforms have responded with measures such as enforced pauses, likened to speed bumps, that hold incoming orders for a certain period, randomizing their position in the queue. Such measures have not been widely adopted beyond the FX market, and exchanges remain sceptical.
“There’s always going to be a race,” said Robert Greifeld, chief executive of Nasdaq OMX. “If you put a speed bump in, then it’s a speed bump to the race, so somebody who has better technology will be able to use that in some fashion.”
Eurex’s Preuss agreed, adding: “Any enforced slowing down of a market will automatically translate into prices being quoted wider. Wider quotes and spreads immediately translate into inferior price-determination quality, which translates into higher costs for those who trade.”
US flash crash
Addressing the US flash crash in May 2010, when the Dow Jones Industrial Average plunged by around 1,000 points within minutes before rebounding, the exchange officials agreed there is a need to ensure markets are better protected against such moves.
“In the US, we still don’t exactly know what the confluence of interplay was that caused the flash crash,” said Jeffrey Sprecher, chairman and chief executive of Intercontinental Exchange.
“We all quickly put in circuit breakers so that we have protection mechanisms in place to prevent a major crash, but it still bothers me that we don’t understand why it crashed, so I believe we need to simplify the markets and make them easier to understand.”
However, Preuss countered that such circuit breakers should have been put in place long ago. “For an industry in 2010 to figure out that it did not have circuit breakers, when circuit breakers had been implemented in Europe on a variety of exchanges for 15 years, is a revelation that shows that somewhere the market design at exchange level had not followed the market design at market participants’ level,” he said.