Batting for the high-frequency trading fraternity must be one of life’s increasingly stressful jobs as regulators rein in the “Flash Boys”.
The latest shots being fired at a sector that divides opinion – out for a free lunch on the back of genuine investors or convenient scapegoat? - are now coming from different direction: exchanges who want to throw grit in the wheels of trading so fast that it can place an order in one-thousandth of the time it takes for the sharpest regulator to blink an eye.
Most exchanges welcome HFT for volume they provide, thus boosting revenue.
But in the United States, IEX Group has applied to become a registered stock exchange and its key selling point is a “speed bump” in the form of a 38-mile coil of fibre optic to blunt the advantage that HFT has over other investors.
IEX would compete with the New York Stock Exchange (NYSE), BATS and Nasdaq.
The speed bump would delay incoming share orders by 350 microseconds, giving IEX time to update prices before ultra-fast traders jump in ahead of traders with slower connection speeds.
Some U.S. market participants have asked regulators to stop speed bumps, saying it would harm market quality. Jeff Sprecher, chief executive of NYSE’s owner ICE, has said speed bumps are “un-American and not fair”.
“We feel confident that a uniform distance imposed equally on all IEX participants, via a physical cable, creates a level playing field that allows IEX to protect orders from being disadvantaged by those who may have access to faster market information and connectivity,” IEX said.
On the other side of the Atlantic, another newcomer, Aquis Exchange, told its members in February it would ban traders that use predatory tactics aimed at moving prices and taking advantage of stock orders from other participants – seen as a broadside at HFT.
In the past Aquis chief executive Alasdair Haynes had criticised European Union attempts, ultimately ditched, to introduce a “resting time” of 500 milliseconds for orders to thwart aggressive high-speed traders.
Haynes had said that market abuse laws were the best way for preventing abusive HFT strategies, but clearly his thinking has moved on as he seeks to boost disappointingly low market share.
The veteran market infrastructure man – a force behind building Chi-X into the European powerhouse that BATS felt obliged to buy - told Trading Places that Aquis actually obtained regulatory approval for introducing a “speed bump” but then mothballed the plan.
“That may not be, in Europe, the best way,” Haynes said. “We wanted to do something that is fair and equal access.”
Instead, Aquis amended its trading rules so that proprietary traders, like HFT, must supply liquidity to the market, but not take it out and frighten away “genuine investors”, Haynes said. He declined to elaborate on how many traders refused to sign up to the new rules.
“We are protecting liquidity provision and that has never been done before through regulatory means, but through speed bumps,” Haynes said. “You stop the aggressive trading by proprietary traders hitting your book.”
In the days after the rule change, liquidity and market share increased, Haynes said.
He hopes this will appeal to asset managers who want less “toxic” trading, with minimal market impact. “If you can reduce the market impact, you have saved asset managers large amounts.”
Haynes does not expect many exchanges to copy the Aquis approach as their fees are based on volume, which is boosted by HFT. Banks and retail brokers have been “hugely supportive”, while some proprietary trading firms “don’t like it”.
Rebecca Healey, chief executive of Incisus consultancy, said market practitioners are rethinking how to pool liquidity as BCNs face closure.
It won’t be the same answer for all.
“Alasdair Haynes’ latest idea of restricting potential negative behaviour on Aquis exchange is evidence of a growing number of market participants who are choosing to focus on the quality rather than the quantity of available liquidity,” Healey said.
“Aquis are not condemning HFT per se, rather offering consumer choice. In this case offering participants who choose to trade in a passive environment a venue on which to conclude their trades without potentially being picked off,” Healey said.
Meanwhile, the regulators are still at it.
The Aquis announcement came at a time when its regulator, the Financial Conduct Authority, said that from September, high-frequency traders will come under the net of new financial sector rules that make them directly accountable for their actions, making it easier to issue sanctions for market disorder.