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And Finally…

It may be a subtle shift but I find it interesting that the new Chicago Fed Letter attempts to advance the debate over high speed trading – a development that more reflects the reality of the modern market.

There remains much emotion and continued misunderstanding over the subject of high frequency trading, mainly because – in spite of the efforts of the CFTC’s Technical Advisory Committee – an easy definition has yet to be generally accepted. What is accepted in market circles but probably needs wider recognition is that high frequency technology is widely used by participants on all sides of the market.

The HFT that remains anathema to so many in the industry typically revolves around forms of arbitrage. There are those that criticise non-bank trading firms for their “sniffer” technology that allows them to discern order flow and act accordingly, but this overlooks the role that predictive technology plays in most bank pricing and risk engines.

There has been, over the past few years, a sustained convergence between how banks and non-bank market makers act in, and view, the market. In several cases the view is exactly the same – increasingly bankers talk of the major non-bank players in respectful terms they normally reserve for genuine competitors.

So a significant article by an institution such as the Chicago Fed, authored by Carol Clark, who has spent much time studying the challenges raised by HFT, that highlights the changing definition is to be welcomed.

The article is focused on the regulatory challenges faced by high speed trading, but the fact is, as an industry, there is a need for our debate to shift towards the infrastructure challenges posed by high speed trading as opposed to high frequency traders.

This subtle shift would take some of the emotion out of the debate and also better reflect how things are today. Pretty much all participants at the financial institution level (and an increasing number of corporates) use high speed technology, be it execution or price making algos (and probably several stages in between), therefore any structural issue we face is an issue created by the majority of participants, not just a small group.

True, smaller, nimble non-bank firms can still represent a problem to the bigger institutions, but the reality of the FX market seems to suggest they rarely survive for long. By successful ring-fencing of certain techniques, the FX market has done a good job of marginalising what is deemed firms behaving badly. This means any challenge to the industry comes from all high speed technology, not just the actions of a small group of faster, nimble firms.

Moving the debate on from HFT to HST is a subtle but, I believe, welcome, change – one that will hopefully be adopted on a widespread basis.   Twitter @lamboPnL

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