scholarly journals Regulations and Technology Behind HFT Latency, Batch Auctions and Payments for Order Flow in the US and EU

e-Finanse ◽  
2018 ◽  
Vol 14 (2) ◽  
pp. 34-46
Author(s):  
Carlos Jorge Lenczewski Martins
Keyword(s):  
High Frequency ◽  
Great Part ◽  
High Frequency Trading ◽  
Order Flow ◽  
Electronic Trading ◽  
Inside Information ◽  
Wholesale Market ◽  
Market Makers ◽  
The Us ◽  
Clock Synchronisation

AbstractSince the appearance of high-frequency trading in the 1990s, speed has become one of the key issues in trading and with it, the controversy around High-Frequency Trading. In recent years, there have been many discussions and analyses of how high-frequency trading may affect the financial market – but still without any clear conclusions. Leaving these opinions behind, many adjustments have already been made in the US and Europe - both to regulations and market rules, impacting not only High-Frequency Trading but general electronic trading as well. These rules and regulations are the result of technological developments in electronic trading and more specifically, High-Frequency Trading and the practice of Payments for Order Flow. The question remains as to how deep regulations should go, especially in the case of HFT which can be severely affected by harsh regulatory requirements or procedures. Because two of the most important issues in HFT are time and information, some of the rules and regulations affect aspects such as not only what type of information and how it should be gathered, but also clock synchronisation and time-stamp granularity. Another issue that may be considered controversial in the field of HFT (although it is not a practice limited to HFT) is Payment For Order Flows. Under this mechanism, wholesale market makers pay brokers for their client’s order flow – a practice that performed in great amounts and at high speeds may give a considerable level of “inside” information. Regulations, especially from ESMA (MiFID II). try in great part to thus mitigate the practice of Payments For Order Flows.The aim of this paper is to present technological advancements in the field of trading communications used, not only by HFT firms, but also by exchanges. Additionally, the objective is to underline some challenges regarding regulatory changes that try to adapt to the current level of technology – for example, those related to clock synchronisation and data processing. One last issue brought forward is the possibility of converting markets from continuous-time auctions to discrete-time auctions - a concept that is aimed at liquidating the speed advantage and competition only to price level and hence, eliminating HFT advantages.

High Frequency Trading of Commodities

2018 ◽  
Author(s):  
Raymond P. H. Fishe
Keyword(s):  
High Frequency ◽  
Equity Markets ◽  
Conclusive Evidence ◽  
Commodity Markets ◽  
High Frequency Trading ◽  
Market Quality ◽  
Market Makers ◽  
Speed Advantage ◽  
Open Outcry ◽  
Derivative Markets

Electronic platforms and high frequency traders (HFTs) have changed the nature of trading. Like equity markets, commodity markets have experienced an influx of algorithmic traders and a decline in “pit” or open outcry trading. Regulatory efforts to understand the effects of HFTs and to offer prudent guidelines or new rules are in their infancy. An overall hesitancy exists because academic studies have produced diverse results on liquidity, volatility, and market quality. This survey focuses on high frequency trading research in commodity derivative markets, documenting basic results and extracting inferences when warranted. Evidence indicates that HFTs act as market makers and their speed advantage has lowered transaction costs, generally during normal markets. Although not entirely conclusive, evidence also suggests that HFTs may exacerbate volatility by withdrawing liquidity in times of market stress, such as during “flash” crashes.

High-Frequency Trading and Conflict in the Financial Markets

2017 ◽  
Vol 32 (3) ◽  
pp. 270-282 ◽  
Author(s):  
Ricky Cooper ◽  
Jonathan Seddon ◽  
Ben Van Vliet
Keyword(s):  
Financial Markets ◽  
High Frequency ◽  
High Frequency Trading ◽  
Market Makers ◽  
Market Participants ◽  
Software Vendor ◽  
Traditional Market ◽  
Recent Developments ◽  
The Way

The last few decades has seen an ever-increasing growth in the way activities are productized and associated with a financial cost. This phenomenon, termed financialization, spans all areas including government, finance, health and manufacturing. Recent developments within finance over that past decade have radically altered the way trading occurs. This paper analyses high-frequency trading (HFT) as a necessary component of the infrastructure that makes financialization possible. Through interviews with HFT firms, a software vendor, regulators and banks, the effects of HFT on market efficiency, and its impact on costs to long-term investors are explored. This paper contributes to the literature by exploring the conflict that exists between HFT and traditional market makers in today's fragmented markets. This paper argues that society should be unconcerned with this conflict and should instead focus on the effects these participants have on the long-term investors, for whom the markets ultimately exist. In order to facilitate the best outcomes, regulation should be simple, aimed at keeping participants’ behavior stable, and the interactions among them transparent and straightforward. Financialization and HFT are inextricably linked, and society is best served by ensuring that the creative energy of these market participants is directed on providing liquidity and removing inefficiencies.

Hidden and Fast Liquidity - Hidden Orders and High-Frequency Trading

e-Finanse ◽  
2020 ◽  
Vol 16 (1) ◽  
pp. 27-35
Author(s):  
Martins Carlos Jorge Lenczewski
Keyword(s):  
High Frequency ◽  
Current Knowledge ◽  
Market Liquidity ◽  
High Frequency Trading ◽  
Specific Topic ◽  
Literature Study ◽  
Actual Knowledge ◽  
Price Effects ◽  
The Us ◽  
Hidden Orders

AbstractThis work focuses on two of the more frequent practices in financial (especially capital) markets -the use of hidden orders and High-Frequency Trading (HFT). Although the use of each of them may reach 40% of the market turnover - even 60% for HFT, the actual knowledge on how they affect liquidity, prices, and market structure is still limited - especially if they are combined. The presence of both of these practices may look controversial, as it seems to be going in the opposite direction to what some of the goals that market regulators try to reach - transparency and increase of market liquidity. Additionally, their use suggests first, to give a clear advantage to some traders while not knowing the exact consequences to others. The aim of this paper is, by performing a literature study, to structure the current knowledge on a very specific topic in the area of market microstructure - the use of hidden orders and High-Frequency Trading. This paper tries to show the motivations, strategies, and eventual price effects behind hidden orders and High-Frequency Trading. It is also important to mention that this paper is based on scarce empirical research available (mainly for the US market) and as such, it is intended to encourage further analysis and research on this important topic.

scholarly journals High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies

2020 ◽  
Vol 71 (3) ◽  
pp. 169-195
Author(s):  
Antonio Sánchez Serrano
Keyword(s):  
Market Power ◽  
Systemic Risk ◽  
High Frequency ◽  
Information Technologies ◽  
High Frequency Trading ◽  
Barriers To Entry ◽  
Negative Contribution ◽  
Academic Literature ◽  
Market Makers ◽  
Use Of Technology

Abstract A wider use of technology has contributed to the rapid growth of trading in stock markets in the last decades, resulting in an increase in the number of participants and a sharp decline in the price of information. High-frequency trading could be seen as a manifestation of this development. A review of the main findings in the academic literature leads to the identification of four main systemic vulnerabilities related to high-frequency trading: (i) adverse selection in orders, with the potential of crowding-out non-HFT market makers in times of stress; (ii) correlation of positions and herd behaviour; (iii) market power that, via technological costs, may impose barriers to entry; and (iv) negative contribution, in some circumstances, to price discovery. The first vulnerability could create systemic risk and several scholars have discussed the introduction of a limit in the speed of trading to address it. This could also contribute to reduce market power of high-frequency traders and over-investment in information technologies. Despite intense research efforts, further data and research is still needed to better understand these vulnerabilities and the adequacy of policies to address them.

High-Frequency Financial Econometrics

2014 ◽  
Author(s):  
Yacine Aït-Sahalia ◽  
Jean Jacod
Keyword(s):  
High Frequency ◽  
Practical Importance ◽  
Financial Econometrics ◽  
Trading Strategies ◽  
Financial Data ◽  
Jump Processes ◽  
High Frequency Trading ◽  
Microstructure Noise ◽  
Econometric Methods ◽  
Mathematical Foundations

High-frequency trading is an algorithm-based computerized trading practice that allows firms to trade stocks in milliseconds. Over the last fifteen years, the use of statistical and econometric methods for analyzing high-frequency financial data has grown exponentially. This growth has been driven by the increasing availability of such data, the technological advancements that make high-frequency trading strategies possible, and the need of practitioners to analyze these data. This comprehensive book introduces readers to these emerging methods and tools of analysis. The book covers the mathematical foundations of stochastic processes, describes the primary characteristics of high-frequency financial data, and presents the asymptotic concepts that their analysis relies on. It also deals with estimation of the volatility portion of the model, including methods that are robust to market microstructure noise, and address estimation and testing questions involving the jump part of the model. As the book demonstrates, the practical importance and relevance of jumps in financial data are universally recognized, but only recently have econometric methods become available to rigorously analyze jump processes. The book approaches high-frequency econometrics with a distinct focus on the financial side of matters while maintaining technical rigor, which makes this book invaluable to researchers and practitioners alike.

High-Frequency Trading

2011 ◽  
Author(s):  
Peter Gomber ◽  
Björn Arndt ◽  
Marco Lutat ◽  
Tim Elko Uhle
Keyword(s):  
High Frequency ◽  
High Frequency Trading
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