High-Frequency Trading: a Game-Changer for Markets?

High-frequency trading has changed the way equities, and to a lesser extent, other assets, are traded. This makes many involved in trading nervous, and they have every reason to be.

The Banker, a leading UK financial publication, devotes a feature article to the complex relationship between traditional and high frequency trading, addressing the issues of industry regulations, vested interests, liquidity and a view that "HFT adds risk and volatility to the market". Alexey Utkin, of DataArt UK, lends his expert opinion on the importance of algorithms for HFIT and the health of the market.

"There is a vested interest between exchanges and trading firms that is hard to uninvent. The exact risks of HFT remain a mystery, which can be unsettling. The big issue is that there is no exact definition of what constitutes HFT. An expert in trading and markets who is familiar with the US Securities and Exchange Commission’s work around HFT describes it as a strategy rather than a technology. Others focus on the technical superiority or the algorithm's purpose."

"Algorithms are by no means just simple codes, but there is a trade off between speed and complexity when deploying algorithms. “More complex algorithms may take into account more parameters and events, but will take longer to execute to make a trading decision,” says Alexey Utkin, financial services practice leader at software developer DataArt."

"The algorithm may hunt price movements by placing a large number of orders at differing prices and volumes at various venues, but sometimes HFT algorithms try to move markets in their favour. Known as ‘quote stuffing’, this practice can inhibit price discovery, actual trading, liquidity and increase volatility as it leads other market participants to act on phantom data, says Mr Utkin. Its purpose, he says, can range from “smoke bomb [ie, a deception] to abuse”.

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