Wayne Wew, Others on High-Frequency Trading: More Regulation Needed?

A report released in late 2015 found that high frequency trading (HFT) has benefited the Canadian economy more than any other industrialized nation. http://www.theglobeandmail.com/globe-investor/high-frequency-trading-helps-canadian-markets-regulator-says/article27661164/

High frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Like the name alludes, high frequency trading is conducted at very fast speeds.

High frequency trading has its positive points and is certainly a by-product of today’s technology.  However, the speed with which high frequency transactions are done has come under fire in the past as fortunes are made in lost in a matter of seconds.  High frequency trading has also been described as unfair because traders with the fastest execution speeds will be more profitable than traders with slower execution speeds.

Interesting to note, before 2009, it is estimated that more than 60 percent of U.S. equity trading was done through high frequency trading. Since then, the global market for HTF’s has decreased to approximately 50 percent.  https://en.wikipedia.org/wiki/High-frequency_trading

While HFT has received a less than stellar reputation in the past, a 2015 Investment Industry Regulatory Organization of Canada (IIROC) study found a lot of the concern was unwarranted. In fact, the report concluded that firms practicing HFT increased liquidity and improved prices. In addition, there was little evidence that HFT traders take advantage of slower traders. http://www.theglobeandmail.com/globe-investor/high-frequency-trading-helps-canadian-markets-regulator-says/article27661164/

“The results of the study did not reveal any concerns that warranted a regulatory response beyond measures already implemented by IIROC and indicate that the presence of HFT has different, mostly positive impacts on Canadian equity markets and those who invest on those markets,” reads the IIROC report. http://www.theglobeandmail.com/globe-investor/high-frequency-trading-helps-canadian-markets-regulator-says/article27661164/

The struggling Canadian economy has been looking for ways to recoup its oil losses for almost two years, and the IIROC report offers optimism. However, opponents of HFTs believe the number needs to be reduced further and more regulations need to be put in place.

Critics like Michael Lewis, author of Flash Boys which was turned into the Oscar nominated film The Big Short, believe, “high-frequency traders don’t provide reliable liquidity and try to take advantage of firms that haven’t armed themselves with the fastest technology,” Lewis told the Globe and Mail. http://www.theglobeandmail.com/globe-investor/high-frequency-trading-helps-canadian-markets-regulator-says/article27661164/

He also pointed to the TMX Group’s 2014 efforts to minimize HFTs on their upstart exchange, Alpha Exchange, as proof that HFTs can be detrimental to the market.   

Wayne Wew (http://ca.linkedin.com/in/waynewew), an international institutional investment consultant, takes a more neutral stance on the issue, but is in favour of more oversight. “Last year, the US introduced some enhanced HFT regulation and I strongly believe that is a step in the right direction,” noted Wayne Wew. https://about.me/waynewew

The U.S. Securities and Exchange Commission effectively closed a loophole that many HFT traders had been taking advantage of. “The move forced all HFT traders to be registered with the Financial Industry Regulatory Authority, which oversees brokerage firms’ practices and monitors all transactions,” said Wayne Wew. “This sort of regulatory oversight should be rolled out globally.”

Many have argued that HFT is the natural progression of market transactions because they utilize the latest technology and science to operate. However, just like any beta software there is still much room for human oversight.