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WFE Focus April 2011
Speed is good?
Peter Clifford
Deputy Secretary General,

The ‘greed is good’ mantra became associated with the financial services industry of the 1980s, for better or worse. In that particular way films have of sometimes crystallizing opinions, the misquote from the film Wall Street scared some, inspired others and probably many left other persons ambivalent about changes to the market.

‘Speed is good’ might sum up the current race to get the fastest access to markets, and reaction to its impact on market quality. Many market participants and regulators are unsure whether this is merely the most recent manifestation of the competition that improves markets, or a detrimental trend in market quality.

This month, three articles focus on the intersection of technology and markets.

WFE publishes the second part of Professor Michael Gorham’s article “How electronic trading has changed the world”. The first part of this article appeared in the July edition of Focus, and was first published in the WFE’s 50th anniversary book, “Regulated Markets.”

From a historical perspective, Professor Gorham reminds readers of the often overlooked benefits that electronic trading has brought to markets. In particular, the electronic order book resulted in much greater transparency for all traders, and lower costs - especially for retail investors. Inevitably, new concerns have arisen, but as Professor Gorham notes, “Markets have always been about competition and competition (…) has always been about speed.”

The view from a market participant’s perspective is also nuanced. Mr. Michael Chlistalla, then Senior Economist at Deutsche Bank Research, makes useful distinctions between ‘algorithmic trading’ and ‘high frequency trading’ (HFT):

 “High frequency trading is not a strategy per se but rather a technologically more advanced method of implementing particular trading strategies.” Or as another market participant explained at a WFE meeting, the ability to send orders at high speed, as well as cancel them just as quickly, is part of the risk profile. The higher the speed, the lower the risk, and this results in more capital or liquidity being available to the market.

Algorithms trace their origins back to an 8th century Persian mathematician Muhammad ibn Mūsā al-Khwārizmī, known in Latin as Algoritmi. Their use in the markets was strengthened by the need to route orders over several execution venues.

Dr. Christian Katz, CEO of SIX Swiss Exchange, takes an in-depth look at how these current questions need to be weighed inside an exchange. Dr. Katz notes that in Europe, “de-regulation was intended to achieve fragmentation of trading’, and the rise of HFT is in part a response to this. “A widely held view is that HFT activity increases competition, hence lowering transaction costs. At the same time…fragmentation in Europe has actually decreased transparency.” Like many of the features of today’s market that he analyzes, the current situation is a result of trade-offs that cannot be corrected without taking all sides of the issue into account.

Also included in this issue is the WFE response to the public consultation paper published by the International Organization for Securities Commissions (IOSCO) concerning ‘technology changes on market integrity and efficiency.’ Many of these market policy/technology questions will also be tackled in the WFE Exchange Technology Briefing that will take place at the Massachusetts Institute of Technology (MIT) from 21 -23 November 2011.




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