Across all asset classes, automated trading—variously known as high-speed trading, algorithmic trading, and high-frequency trading—is informing much of the transatlantic regulatory debate.
“Regulation has always been there, and always will be,” said Philippe Carré, global head of client connectivity at trading technology firm SunGard’s capital markets business. “But over the past five years, regulation has become a topic in itself: from Australia to South Africa to Latin America to Europe and to the U.S.—everyone is talking about regulatory intervention, and these rules are increasingly shaping the capital markets world.”
The pace of technological change has accelerated, said Carré, “from smart-order routing in Europe and the emergence of dark pools to the big data phenomenon and the shift among equities firms towards leveraging technology to enter other asset classes”.
“The speed and acceleration of the adoption of new technology adoption has been very impressive,” said Carré.
The U.S. Securities and Exchange Commission will soon have the ability to monitor transactions in real-time in order to detect potentially disruptive market activity stemming from high-frequency trading.
The SEC has delegated to the Financial Industry Regulatory Authority, Wall Street’s self-regulator, and other self-regulatory organizations the task of creating a consolidated audit trail, or Cat, and has also contracted with Tradeworx, a high-frequency trading firm, to provide real-time information.
“The current global credit crisis and new banking risk and compliance regulations are changing the competitive landscape of the global trading industry,” said Ed Elgerzawy, partner in SunGard’s consulting services arm. “The unprecedented and far-reaching rules mandated by Basel II, Dodd-Frank, MiFiD and Emir are triggering sweeping industry changes that encompass high-frequency trading rules.”
Tale of the Tape
One of the key demands from buy-side firms in Europe has been to push regulators to introduce a post-trade consolidated tape.
“This is an issue as much about the cost for them of acquiring data and paying all of the different sources of it as well about the cost of managing that fragmented data,” said Chris Pickles, head of industry initiatives at BT Global Banking and Financial Markets, a provider of networked-based services. “Financial institutions rarely ask regulators for more regulation, but with regard to market transparency that’s what buy-side firms and their industry associations have been asking for in Europe.”
High-frequency trading is also set to be regulated for the first time under MiFID II—as the practice was in its infancy when the original MiFID document entered into force in 2007—with its provision to introduce a minimum resting time for orders to remain valid on an exchange for at least 500 milliseconds.
Trading venues are also expected to ensure exchanges can cope with sudden market stresses and potentially introduce ‘circuit breakers’ to suspend trading if necessary.
“Systems are not ready yet for massive high-frequency trading,” said Zohar Hod, global head of sales and support at SuperDerivatives, an options pricing specialist. “As the electronic wave is hitting the trading beach, more prolific HFT algorithms are hitting the market and expanding to asset classes other than equity.”
Many of the systems in the market were not built to handle these speeds or volumes as demonstrated by recent crashes.
“This infrastructure is slowly becoming more robust, but large investments are needed to keep up with the changing market,” said Hod. “The new way of trading derivatives products will only enhance this problem.”
Big data, which has come to encapsulate exploding volumes of data brought on by changes in market structure, technology and regulations, has supplanted latency as the gating factor in market data.
Big Data Issues
The International Securities Exchange (ISE), a U.S. options exchange, is tackling the issues presented by ‘big data’ in the capital markets with its premium hosted database (PhD), a managed historical tick database.
PhD was launched earlier this year, offering the full Opra (Options Price Reporting Authority) feed, including quotes and trades from all U.S. options exchanges, U.S. equities level one data, pre-computed implied volatilities and Greeks, and corporate action histories.
“Even though there isn’t a best execution rule for options as there is in equities, options traders are keenly interested in utilizing data for transaction cost analysis for market making, quantitative analysis, research and compliance,” said Jeffrey Soule, head of market data at ISE.
ISE, along with the nine other U.S. options exchanges, is required to send top-of-book data to Opra, which disseminates it as a consolidated feed to the industry.
Opra tick data is extremely voluminous—over 100 gigabytes a day is produced. A year’s worth of data could be 25 terabytes, which is too much data for firms to manage on their own.
A wild card in all this is emerging markets.
“Once upon a time, accessing far-flung market places was left to specialized trading desks and brokers,” said Carré at SunGard. “Now even my grandmother knows what BRIC [Brazil, Russia, India and China] means. We see demand of the same nature for accessing mature and emerging markets [such as] ‘can I trade electronically?’ and ‘can I clear and settle easily?’. Emerging economies are making great use of new technologies to open up their capital markets.”