The release of âFlash Boysâ by Michael Lewis was always going fuel the âis HFT a good or bad thing for marketsâ debate. But it is important to remember that there are two sides to every story. Since the May 2010 flash crash, where the Dow dropped over 900 points, HFT has been under the spotlight. The general view was that the event was closely related to the presence of high-speed traders in the market.
This is why, four years on from the flash crash, the market as a whole needs to approach new claims from Lewis that the stock market is âriggedâ by HFT with caution. Of course if anyone really is rigging the market it should be dealt with by the appropriate authorities but donât blame the machine. While smarter oversight of the practice is required, it is important that regulators do not have a knee-jerk reaction to this book by implementing ill-thought out rules. Further proposals to regulate HFT, in addition to what has already been proposed from MiFID and the FTT, could significantly increase transaction costs for end-investors.
One thing we have learnt is that HFT firms have demonstrated their ability to change strategy as quickly as the markets move. Their likely response to further controls will be to move rapidly into new markets to drive more liquidity. We are already seeing certain HFT firms explore the possibilities of moving away from more established trading venues in favor of emerging markets. HFT firms are not only expanding their geographical reach, but also their strategies to help guard against any future regulatory risks they could face.
Given the current market dependence on the liquidity HFT provides, regulators must consider hard facts over commercial or political pressures when making decisions. It would be a pity for the benefits of HFT to be lost purely because of the negative light in which the practice has been cast in Flash Boys â a case, surely, of throwing the baby out with the bathwater.
âDev Tyagi, General Manager at Supermicro UK, a provider of X86 technology architecture typically used by high-frequency traders.