Eugene Grygo,
chief content editor,
FTF News
High-frequency author Michael Lewis is having some major success in getting the mainstream media and thus people in power to take notice of the dangers (and upsides) of high frequency trading (HFT). The Justice Department, the FBI, the New York Attorney General, the SEC and the CFTC are stumbling over each other like Keystone Kops to get on the anti-HFT bandwagon.
During the week after Lewis was interviewed by CBS’s 60 Minutes about his new anti-HFT polemic “Flash Boys,” the U.S. and the New York state governments have discovered HFT. Attorney General Eric Holder announced during a House hearing on Friday, April 4, that the Justice Department is looking into the possibility that HFT contradicts insider trading laws.
Holder’s remarks follow reports of FBI investigations and utterings from SEC Chair Mary Jo White who is concerned enough about HFT to also investigate whether the practice of trading near the speed of light is actually a form of high-tech front running. In fact, White told Congress that there have already been investigations of HFT firms and their practices. The CFTC is reportedly reviewing the propriety of the connections between HFT firms and securities exchanges. New York Attorney General Eric Schneiderman is also giving the practice a look.
Why should operations and middle-office staff care about these and proposed investigations and thus the politics of HFT?
First, I can offer anecdotal, off-the-record evidence that some sell-side firms have middle and back offices that cannot keep up with HFT or near-HFT strategies. Some firms, I am told, have to pause or slow down front-office trading so that their risk management/risk scenario/modeling, valuation, collateral management, record-keeping, settlement and other support systems (or manual systems) can catch up to trading at the electron level.
So, from a purely practical standpoint for those firms, some kind of synchronization needs to happen among the front-, middle- and back-offices to better serve buy-side clients. It would be fascinating to one day see a high-speed trading enterprise synchronized from front to back to take advantage of HFT. I would also like to know if the regulators are investigating these situations.
Secondly, from a market structure and fairness point of view, the industry has to come to grips with the benefits and drawbacks of super-fast trading. Are high-frequency trading technologies truly rigging the market against the buy side to the point that no countering technologies can help? No one other than Lewis is offering a definitive answer to that question.
Over the years, we have seen several reports arguing that HFT is good for the market despite the handwringing of regulators because it snaps the market into shape. Yet others like Lewis maintain that setting up a high-frequency trading shop is a license to front run the market, make billions and get away with it. Sadly, this argument is now seen by some fools as the very reason to get into HFT and make out like bandits. Call it “The Wolf of Wall Street Effect.”
Yet, despite the investigations underway and those to come, it is impossible to stop HFT technologies and their usage. The regulators may find ways to impose more brakes on HFT practices and may attempt to insure fairness in an increasingly rough-and-tumble market. But I cannot imagine an outright ban of HFT. Other solutions may emerge such as Lewis urging the market to take its business to exchanges that restrict HFT interactions.
One thing is certain: the government and its agencies will not be moving at a high-frequency rate; I would be very surprised to see swift action from the powers-that-be. We may eventually get some practical changes from this latest flurry of press releases, statements and inquests. I suspect, though, that the knee-jerk reactions we’ve seen this week will quickly fade as the short-lived glare of the media moves onto another subject.
HFT infrastructures aside, no one yet has invented a system that moves as fast as the hot air of politicians and bureaucrats.
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