Paul Krugman, Princeton prof and general uber-commentator, is among the latest market watchers to jump into the high frequency trading debate. He argued in a New York Times op-ed at the weekend that the practice of using “super-fast” computers was developing an asymmetric market, in which those without the relevant advanced technology stood to lose out to those with it.
Specifically, he noted, HFT could degrade the stock market’s function all together. As he wrote:
And there’s a good case that such activities are actually harmful. For example, high-frequency trading probably degrades the stock market’s function, because it’s a kind of tax on investors who lack access to those superfast computers — which means that the money Goldman spends on those computers has a negative effect on national wealth. As the great Stanford economist Kenneth Arrow put it in 1973, speculation based on private information imposes a “double social loss”: it uses up resources and undermines markets.
Of course, the counter argument is that HFT tightens spreads, lowers fees and generally provides much-appreciated liquidity in an increasingly fragmented market-place.
A Barcap conference call on the matter certainly concluded as much. As Bloomberg reported: July 28 (Bloomberg) — Frank Troise, the head of electronic equity trading products at Barclays Plc, says using computers to execute orders in milliseconds is no different than brokers jockeying for position years ago on the floor of the New York Stock Exchange. “This has been going on for quite awhile, and it’s now at a fever pitch,” says Troise, 43, who is based in New York. “There’s always been an advantage to executing with speed.”
BarCap is right to point out the practice is nothing new. As can be seen in the chart below provided by the bank on Monday, electronic platforms — and via that electronic trade — have been creeping into the marketplace at a constant rate for decades. Note the following volumes:
But then again, BarCap is talking its book here. Thanks to its acquisition of Lehman’s US operations, the bank is now one of the market’s biggest blackbox providers and HFT players. Just some of the nifty gizmos picked up include Lehman’s Web Bench pre-trade analytics tool, LX internal crossing network, algorithms, direct market access capabilities, FIX connections and trading platform.
And as we now know, Barclays sees that acquisition as having been hugely successful as well as a major driver of second quarter profits. While there’s no breakdown of how the above directly contributed to its Q2 numbers, BarCap does state that it’s daily VaR increased 100 per cent in the first half from £43.8m in the first half of 2008, “mainly due to increased position taking arising from the acquisition of the Lehman Brothers North American business and increased market volatility.”
Its marketing material to clients, meanwhile, offers to “plug you into” their blackboxes directly, forex bots included. Here’s some of the blurb:
We can integrate BARX Futures and Options Trading with any third party OMS, Black Box, or network via the FIX Protocol. Our global FIX connectivity team can develop a Futures via FIX solution tailored to your execution and STP needs.
With BARX via FIX, future & options traders benefit with:
* Global order routing in standard format to over 30 exchanges
*Maximum speed of execution
* Complex strategies (i.e. calendar spreads)
*Market data on key exchanges
As a global leader in electronic trade execution, we’ve developed sophisticated algorithms for Futures, Equities and FX. Now you can use the same strategies as Barclays Capital. Increase control of your trading objectives whether pursuing relative value strategies or managing large execution sizes. Plus, your multi-asset class trading can be enhanced with a range of core algorithms and intermarket and multi-leg strategies.
Specifically interesting are the algorithms Barcap offer for strategy/pairs trading. The software, it says, can be used to execute basic or speculative-mode across all sorts of multi-asset strategies:
Basic Mode:
The strategy observes the prices and quantities trading on the market and when the correct trading conditions are met, orders are then sent to the market.
Speculative Mode:
Selected legs of the trade are ‘shown to market’ at a level that would satisfy the relationship. If any of these legs are filled, the other legs are then executed. By being in the market, speculative mode increases the possibility of trading at desirable levels. Slip correction features are built in to compensate for any previous price slippage that may be encountered during execution of the algorithm.
Of course, the above technology is not exclusive to BarCap. There are numerous boutique firms offering similar algorithmic multi-asset capabilities. Consequently, are we surprised there are increasing correlations everywhere?
Related links:
High frequency trade in Europe – FT Alphaville
The Cold War in high frequency trading turns hot – FT Alphaville
Rewarding Bad Actors – NY Times