Should Asia Be Concerned With ‘Flash Boys’ and HFT?
|“Asia should not be too concerned with Flash Boys and HFT as the market structure in Asia is not very sensitive to, what some call, HFT ‘abuse’, as described in Michael Lewis’s ‘Flash Boys’. In the US, HFT firms took advantage of regulation prescribed in Reg NMS, on the requirement of an NBBO, by having a faster connectivity to the 12 exchanges (and several alternative platforms) than the exchanges themselves. By making use of this, they could outrun a large order in a specific stock that was going to be executed in parts on the several exchange platforms. This kind of market structure is in Asia far more limited to maximum a few alternative platforms per country and I do not see a pan-Asian expansion happening either as the national markets are fairly fragmented and all have their own rules, regulations, transaction costs and often stamp duties.
This does however not fully take away the very slim chance of algo’s going haywire, and potentially causing a flash crash or at least a large loss for the firm in question. Regulation on circuit breakers and potentially a large order per second limit could, for the greater part, take away this risk. For the rest, Algo- and HFT shops should just get the freedom to do why there were set-up in the first place: making profits by arbitraging away tiny price-differences in related products and making markets more efficient and liquid at the same time.”
|“It’s important not to take the recent HFT debate at face value alone and be mindful of the motivations of the parties involved in the discussion so any knee-jerk reactions are limited. In APAC, the level of competitiveness across exchanges and fragmentation is much lower than in EMEA and North America. The issues discussed in Flash Boys, whether you feel that they good or bad for the market as a whole, do not impact APAC to the same extent today, but likely will in the future. The ability to reach new markets and trade fast is not a new concept, the challenge for all participants is to understand the implications this brings and continue to evolve with the technology demands that are driving markets. Working with global vendors can help to ensure that you have access to the latest tools and the visibility on market trends helping you continue to be correctly positioned in the market as technology and regulation continuously develops around you. The concern we have is a trading landscape where market participants reduce their latency by bypassing regulatory checks put in place to safeguard all investors.|
|“HFT’s are primarily liquidity providers / market makers. These intermediaries step in the middle of investors’ trading strategies and in this process they serve a true purpose: they facilitate price discovery. The majority of the deployed HFT strategies will create liquidity and reduce spreads, which has in turn reduce the costs of trading. Hence HFT’s, or liquidity providers, have a very sustainable function in global capital markets.
Liquidity Providers cannot do their job, make markets/provide quotes, without actually knowing what the current market is and this can only be achieved by deploying low latency technology. With this information they make trading decisions as fast as possible using powerful computers.
A firm willing to invest in speed and technology cannot be seen as being “ripping off investors”; Investors today see prices trading through their online trading account at their (retail) broker. If broker XYZ has a quicker online platform than broker ABC, is that unfair competition by broker XYZ?
ABN AMRO Clearing shares the opinion of its home regulator, the AFM; The further development of technology and automation of trading in financial instruments would appear to be an irreversible process. The market structure that has contributed to the growth of HFT is also here to stay. The most sensible course for policymakers and regulators therefore is to devote their efforts to further improving the existing market structure.”
|“When the Flash crash happened May 6, 2010, it was clear Asia took notice. It’s also fair to say that, intellectual interest aside, some exchanges acted on it and took it more seriously than others. Many exchanges in APAC weren’t really HFT ready and still aren’t. Earlier that year Arrowhead went live in Japan and so they took serious notice as to the outcomes. India markets also had more upgrades to speed up their exchanges and had their own flash crash on NSE in October 2012 although more due to human error than “flash boyes” per se. There were a lot of questions from Chinese exchanges and regulators as to why and how such events could occur. Till now their market isn’t HFT ready and indeed many rules are in place to dampen rather than encourage such trading activities. On January 1st 2014 the SFC (HK regulator) also introduced various guidelines and rules around algorithmic trading just while their market is in a major Orion upgrade to become much quicker. Many markets like Thailand, Australia, Singapore, still however continue to invest in newer technologies that process faster and thus support or are more attractive to HFT players. So in summary competition between the exchanges pushes them to become faster and no doubt they will continue to introduce rules and guidances to ensure a flash crash doesn’t eventuate in Asia.”|