UK Report Advises Against More HFT Regulations

On Tuesday a UK-commissioned report looking into High-Frequency Trading (HFT) will call for action to limit sharp swings in the markets in an effort to better manage systemic risk.

The Foresight Report

“The Future of Computer Trading in Financial Markets” report was produced by Foresight, a division of the Government Office for Science, and is meant to provide guidance on the formulation of a policy response to computer trading without reflecting the views of the government.

The study, headed by Professor Sir John Beddington, urges regulators, brokers and investors to closely examine the use of circuit breakers meant to stop sudden swings in the market and to protect investors from large volatility by reducing “tick sizes” – the portions by which asset prices are allowed to fluctuate.

The study concludes that computerized trading has increased liquidity and lowered transaction costs but it has also produced instances of sudden instabilities and disruptions leading to “flash crashes”.

“The commonly held negative perceptions surrounding high- frequency trading are not supported by the available evidence, but policy makers’ concerns are justified about the effect the practice may have in some specific circumstances,” Sir Beddington said as quoted by Bloomberg.

Foresight also warns that proposed HFT curbs in Germany and the EU could have a negative impact on Europe. Such measures include minimum order resting times, notification to authorities of algorithms and the imposition of market maker obligations.

The report states that HFTs play a “relatively small and insignificant” role in causing volatility in UK equity markets, which is mainly the result of the macroeconomic crises of the past five years.

Tim Cave from Financial News wrote that the Foresight project has come under intense criticism and its authors have been labelled “tobacco professors” for siding with HFT interests, straying beyond their initial assignment and delivering weak conclusions.

“The aims and remit of Foresight are commendable, however, the detail of the report is methodologically challenged. This questions whether this reactive report has deviated from Foresight’s central aim.” said Stuart Baden Powell, head of electronic trading strategy at RBC Capital Markets, in an interview with Financial News.

Natural-Gas Market Plagued by HFT

According to the Wall Street Journal, many seasoned natural-gas traders have been sitting on the sidelines over the past few months with HFTs having swarmed the market.

Veteran traders would usually wait in anticipation for the weekly report of gas-inventory figures by the U.S. Energy Information Administration released on Thursday at 10.30 AM and then dive into the busiest trading window of the week.

This is no longer true as most traders are now staying out of the market due to the HFTs new strategy – sending floods of orders in an effort to trigger huge price swings just before the data gets released, also known as “banging the beehive”.

The algo traders have recently increased their activity in the commodities markets, natural gas in particular, because of the wide gaps between the prices offered to buy and sell future contracts, which can lead to easier profits. “We can fight over fractions of a penny in stocks, or full pennies and more in natural gas,” said a New York HFT programmer.

Because the market reaction is not in accord with the data released but rather is artificially created by the HFTs, floor traders say they and their clients have no chance to compete.

Scott Gettleman, a Nymex floor broker, had to stop trading around the data release about six months ago.

“It was always going to be volatile, but at least if you had the right idea, you’d get paid for it. Now, you can put yourself on the line, but you’re flying blind.”