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High Frequency Trauma - What unintended consequences are in store as regulators target HFT?

Published in Automated Trader Magazine Issue 26 Q3 2012

Proposals to regulate automated trading have been coming thick and fast. Bob Giffords, with the help of a host of market participants, peers into a crystal ball to see what some of the side effects could be if any of these ideas were adopted, and whether the market has cause for concern.

shooting ducks

Justin Schack

Justin Schack

"There's a fair amount of actionism in the air," says Dennis Lohfert, fund manager at Ion Asset Architecture.

For Lohfert, the regulatory focus on high frequency trading (HFT) can be viewed through a psychological prism: in times of crisis, people want to be perceived as doing something. "History is filled with archaic constructs in legislation and regulation that were implemented without any real need and then happened to linger for literally decades."

The result is a broad and potentially threatening agenda for HFT traders. Some of the most talked-about ideas being bandied about include: a transaction tax, speed bumps for markets, maximum order-to-fill ratios, minimum order resting times and market making obligations for HFT traders.

Yet is the regulatory bark really worse than its bite? Certainly, many automated traders are feeling victimised. They demand to see evidence that automation coupled with competition is bad for markets. "Every empirical measure of market quality shows market quality has improved for investors," says Cameron Smith, president of Quantlab Financial, a Houston based quantitative technology and trading company.

Is such mistrust justified? What is the real impact of such regulation likely to be on the day-to-day automated world that many embrace, but others fear?

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