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Hillary Clinton HFT tax proposal - reaction from ParFX

First Published 9th October 2015

This week, US Democratic Presidential candidate Hillary Clinton proposed an idea of taxing high frequency transactions with excessive order cancellations that are deemed to enable abusive trading or could threaten to destabilise financial markets. In response, Dan Marcus, CEO of ParFX, the trading platform launched by 14 global banks specifically to combat disruptive trading behaviour, outlines his view on how regulatory authorities can tackle this issue.

Dan Marcus, ParFX

I think what Hillary Clinton is proposing is not necessarily new - a tax on financial transactions has been floated in Europe - but would be clearly welcomed by those who see the machines as a bad influence in financial markets.

HFT clearly still has a reputation problem, but at the same time it's important to note that high-frequency trading is not bad in itself, and it is unfair to paint all those who practice it with the same 'dark arts' brush. It is a logical and natural evolution of electronic trading which brings many benefits.

However, there are some real concerns relating to disruptive trading behaviour and these are justified and worthy of discussion. In the pursuit of speed, disruptive trading behaviour and an arms race for the fastest market data and technology has created inefficiencies that damaged the wider trading environment.

But how should the market and regulators react? Rather than an ineffective and expensive cure in the form of legislation or taxation on trades, which will take years to implement and almost certainly result in regulatory arbitrage, a proactive preventative solution is required.

In the same way bad drivers caught speeding are held responsible for their actions, as opposed to blame apportioned to the cars they drive, the focus needs to be on eradicating disruptive trading behaviour and the intent behind it.

The central issue is around the behaviour and conduct of individuals engaging in such practices, and the trading venues encouraging or facilitating this type of behaviour. Ultimately, this is what needs to change.

In partnership with 14 global banks, who expressed a strong desire to address these issues, ParFX has introduced a multitude of features that removes the emphasis on speed as a factor of success. This included the introduction of a meaningful randomised pause of 10-30 milliseconds on the platform.

Essentially, what this does is deliberately slow down and randomise trading instructions so the fastest, latency-dependent traders have no guarantee of being the fastest. This means the platform does not suit extreme low-latency disruptive strategies as they simply will not work in the trading ecology we have created.

However, the pause is meaningless to those that come with a genuine trading need, who seek firm, executable liquidity and compete on strategy. We are finding that the firms we speak to are motivated by competing on intelligence rather than speed, and we have yet to meet anyone who disagrees with our philosophy.

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