World exchanges turn to high-frequency trading firms

Muammer Cakir, Managing Director at Borsa Istanbul, has said that his firm is “welcoming foreign investors and that includes HFT firms.”

Despite the associated risks, algorithmic robot traders, or ‘algobots’, can buy and sell in the blink of an eye, greatly increasing trading volumes and this is very attractive to exchanges. Greater volume brings investment and the cycle continues, benefiting all parties.

Those in favour of this speedy technology detect revolution in the air, seeing how markets have at last been propelled into modern age, replacing the suited sharks guarding their posts.

Michael Lewis, however, is not convinced. The author and journalist who bestowed the term ‘flash boys’ upon the Wall Street vernacular feels HFT allows wizards of the trade to unfairly profit at the expense of others. Sharing similar concerns, US authorities have launched investigations into these cutting edge practices.

But the exchanges are not for turning, at least not yet. Up until this point the influence of HFTs has been minimal in Turkey, but Cakir’s exchange is preparing to step up its stock trading systems in September to capture more HFT business, with a view to implementing the same course for its derivatives platform in 2016.

Co-location is also being used in Borsa Istanbul - a practice that supports HFT by traders putting their computers next to exchange systems. The main goal is to attain more institutional and overseas trading, HFT being seen as main facilitator in this process.

Last month Tokyo Stock Exchange members went to New York to promote pending TSE upgrades to its Arrowhead trading engine. Arrowhead already fits orders over 1,000 times faster than was possible five years ago. Furthermore, Susquehanna International Group and KCG Holdings Inc. were granted ‘remote membership’ at Japanese exchanges, allowing firms to place buy and sell orders directly on the exchange for the first time since 2009.

The case against HFT trading in Western Europe and the US argues that splitting markets into numerous venues permits algobots to seek out profitable trades across multiple platforms, a practice otherwise known as latency arbitrage. On the other hand, most exchanges in locations such as Tokyo are monopolies; over 90 per cent of the Japanese stock trading is carried out on the TSE, and HFT has not been waylaid by the presence of the single market which accounts for around 44 per cent of transactions. The advent of algobots taking over roles previous occupied by traders, critics say, is unsettling for markets and gives practitioners an unfair advantage. More worryingly, should algobots fall en masse from a market; their withdrawal could cause sudden swings.

However, despite being investigated by a number of US agencies, HFT has shown no sign of widespread foul play. Officials in the States issued a report this week stating that in the Treasury market, HFT firms exacerbated wild price swings on October 15th of last year.

While the exchanges claim hyperkinetic high frequency trading reduces the price discrepancies between buying and selling, and also promotes trade execution, which is attractive to long-term investors.

Eduardo Flores, Vice President of Market Supervision at Comisión Nacional Bancaria y de Valores, says, “they’re not necessarily bad” but “are market makers which promote liquidity.”

Luis Carballo, an official at the Bolsa Mexicana de Valores SAB, claims the bourse in Mexico is driving for more HFT traders in a bid to boost volumes. According to Carballo, around 70 per cent of the stock trades on Mexico’s national exchange involve HFT, as the Bolsa seeks to improve the efficiency of its market data platform.

Last month local brokerages in New York hosted Mexico exchange executives to set up meetings with clients, coders, traders and other users of the Bolsa market data.

Alfredo Guillen, Chief Operating Officer for equities at the Mexican exchange, has said that such the core target of such meetings has been to improve connectivity as high-frequency trading has become more widespread.

In May 2014 the speed of data going from a trader to its servers and back was slashed to 150 microseconds from 2,2550 microseconds. This has been made possible thanks to a new co-location facility open in May of last year by JSE Ltd, the firm that runs the Johannesburg Stock Exchange.

Last year stock transactions on the JSE rose 19 per cent, with a daily average traffic nearing 400,000, up around a third on previous records. In response, Donna Oosthuyse, Director of Capital Markets at JSE said “As part of our revenue-growth strategy, we engage in business origination where we seek new flow from a variety of market participants - buy side, sell side, retail as well as firms that employ low-latency trading strategies, also known as HFT players.”

China stands as the big hurdle for high frequency trading if it is to properly achieve global dominance. Stringent government regulation, stamp duty on stock trades and market inefficiency have been stifling the algobots thus far, but there may be a way through yet; Doug Cifu, CEO of Virtu Financial Inc. said recently that his firm was having “very significant preliminary discussions” about making a breakthrough in China.