15/7/2013: Two notes on HFT effects on the markets

Two interesting notes on the financial markets general operational issues in relation to High Frequency Trading (HFT).


A quick post from the Aziz Economics: http://azizonomics.com/2013/06/15/have-financial-markets-gone-post-human/ on the topic of HFT and data disclosure. Do read the Nanex post cited: http://www.nanex.net/aqck2/4302.html

Basic idea is that speed of light separates trades in the current market. With some data being released in different formats and to different audiences at different times, this difference drives a massive wedge between HFT trades and ordinary order flows.

And a couple of quotes:

"... is having a two second jump on the market “insider trading”? Well, yes — but it’s legal insider trading with consent, out in the open."

Yep, you can pay more to get information ahead of everyone and then pay a bit more to execute trades ahead of the mere mortals. You can then collect the upside (you'd have to be pretty dim-witted to collect a downside on such a trade).

And that means that the old-fashioned elbow-grease and hard labour analysing stuff, forecasting it, setting a strategy, hedging etc… all become subservient to the speed of access + speed of execution.

Human is gone. Algo is in...
"… perhaps the beginning of the end for human traders is just the end of the beginning for global financial markets. Perhaps that is less of a death sentence, and more of a liberation, allowing talented human labour that in recent years has been channelled into unproductive and obscure projects in big finance to move into more productive domains."

I don't know. But I'd like to think a person is still somewhere under the sun in the markets. Otherwise, how can be make any connection between the financial markets, instruments traded and real side of the economy, aside from the sides glimpsed through high-frequency-advanced-release mechanism?..



And a paper on HFT effects on market index here: http://www.nature.com/srep/2013/130702/srep02110/full/srep02110.html

The paper shows that in short time scales stocks have a stronger influence on the index, rather than index has on stocks that are constituents of the index. This is encouraging, as it suggests that within shorter time horizons, extreme HFT-linked instrumentation of index is far less of a driver than HFT-linked instrumentation of individual stocks. In other words, whatever relevant information is contained in the stock gets indeed transmitted into index at high frequency and this information dominates index-own changes.

23/10/2012: HFT restrictions and market efficiency

In my class on Investment Theory (MSc in Finance, TCD) we've discussed the issues relating to markets efficiency, HFT and relative speeds in newsflow and trading. We are going to talk more about this subject in my course on HFT in early 2013.

Here is the latest report on the effects of the EU regulatory interference in HFT.

Quote: "European Union plans to clamp down on trading shares faster than the blink of an eye could damage market efficiency and reduce liquidity, a UK government-sponsored paper said… A report by the Foresight Project, which was sponsored by the British government and gathered evidence from 150 academics and experts from 20 countries, said plans to force minimum resting times on orders could reduce liquidity."

The Project (led by John Beddington, the UK's chief scientific advisor) has found that:

• "...some of the commonly held negative perceptions surrounding HFT are not supported by the available evidence and, indeed, that HFT may have modestly improved the functioning of markets in some respects"
• "However it is believed that policymakers are justified in being concerned about the possible effects of HFT."
• "The report found no direct evidence that HFT increased volatility, nor evidence to suggest it has led to an increase in market abuse."
• "It said that computer-based trading could have adverse side effects in some circumstances and that these risks should be addressed."

As my students would know, I am of two views on HFT:

1. HFT is a necessary activity with inherent risks (as any other activity in the market) 
2. HFT can act in contradiction to the direct real-activity nature of the financial markets, but so can other financial instruments and strategies (e.g. hedging across non-asset-related risks, e.g. using Forex markets).