The Great Debate UK

HFT: Separating fact from fiction

–Hugh Cumberland is solution manager, financial services at Colt Technology Services. The opinions expressed are his own.–

Over the last few years, every time a stock, sector or index takes a sudden, sharp and unexpected dip, almost every commentator with a passing knowledge of capital markets declares it a high frequency trading (HFT) inspired flash crash. But this judgement has more to do with the negative connotations associated with HFT than the reality, as very few such corrections have definitively been ascribed to HFT.

To its credit, there is no denying that HFT has reduced transaction costs, narrowed spreads and increased liquidity. And there are pro-HFT arguments that say that it can mitigate the impact of sentiment driven sell offs. But it is still seen as an evil force and regulators are pushing against an open door when they introduce new measures intended to curb or completely arrest HFT. We’ve seen two examples of this recently: the European Union earlier this year agreed to introduce a number of new regulations governing HFT, and in February, Germany introduced new regulations requiring HFT firms to be licensed with the country’s regulator, BaFin.

Being closer to, or faster to, the market has been a desire since we started trading in centralised markets. Criticising HFT firms for gaining an advantage over the man in the street purely by exercising spending power is absurd. The man in the street is not in a position to open a car factory, build a nuclear power station or launch his own ocean-going liner either – it’s an economic fact that capital expenditure can be used to create advantage over those who don’t have access to the same levels of capital.

Who’s to blame for market glitches?

–Tanuja Randery is the CEO of trading services firm MarketPrizm. The opinions expressed are her own.–

A recent spate of high profile trading glitches at NASDAQ, Goldman Sachs and China-based brokerage Everbright, have once again put the spotlight on electronic trading technology and in particular, high frequency trading (HFT), which uses complex algorithms to analyze multiple markets and execute orders based on market conditions.

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