THE VIEW FROM THE EXCHANGE October 6, 2015
MARKET STRUCTURE AND A HEALTHY TRADING ECOSYSTEM
WHY HFT? High speed algo trading: confluence of technological progress and regulatory
changes in MiFID I
3
4
Terms like robot
trading, computer
trading, Algo and HFT
are used at random.
The term olgo trading can
be segmented into
traditional automated
trading and High Frequency
Trading
WHAT ARE WE TALKING ABOUT?
HFT
Algo trading
Total trading
Source: 2009 McCann quantitative and qualitative study with over 200 CFOs and senior executives.
COMMON FEATURES OF HFT
Arbitrage
trading – HFT is the electronic
equivalent to day trading
No
overnight
positions
Proprietary
trading
Computerized high-speed
micro seconds trades
AUTD- accounts with Order-to-trade
over 10 Based on Nordic list
share trading
HFT is conducted both by
specialist firms and by the
traditional
members, including large banks
5
No standardized
international definition
Still, there are a few common
characteristics
Document Title 6
0
0,1
0,2
0,3
0,4
0,5
0,6
20
07
-06
20
07
-11
20
08
-04
20
08
-09
20
09
-02
20
09
-07
20
09
-12
20
10
-05
20
10
-10
20
11
-03
20
11
-08
20
12
-01
20
12
-06
20
12
-11
20
13
-04
20
13
-09
20
14
-02
20
14
-07
20
14
-12
20
15
-05
Large Cap
0
0,5
1
1,5
2
2,5
3
20
07
-06
20
07
-11
20
08
-04
20
08
-09
20
09
-02
20
09
-07
20
09
-12
20
10
-05
20
10
-10
20
11
-03
20
11
-08
20
12
-01
20
12
-06
20
12
-11
20
13
-04
20
13
-09
20
14
-02
20
14
-07
20
14
-12
20
15
-05
Mid Cap
0
1
2
3
4
5
6
7
20
07
-06
20
07
-11
20
08
-04
20
08
-09
20
09
-02
20
09
-07
20
09
-12
20
10
-05
20
10
-10
20
11
-03
20
11
-08
20
12
-01
20
12
-06
20
12
-11
20
13
-04
20
13
-09
20
14
-02
20
14
-07
20
14
-12
20
15
-05
Small Cap
Increased activity Efficient pricing = lower cost for investor
Efficient pricing
NASDAQ OMX 7
Smaller orders
Smaller trades
More orders
More trades
More delete messages
Orders/trade ratio up
More information to disseminate
• Less liquidity in the order book
• Harder to execute large orders
Need to use algorithms
Dark liquidity pools
Hybrid order books
New order types
Latency & capacity in focus
More revenues & more cost
EFFECTS OF HIGH FREQUENCY TRADING
Fragmented liquidity
Better price discovery?
High Frequency Trading
NASDAQ OMX 8
RIGHT AMOUNT
OF HFT?
Avoid HFT by rules,
regulations and fees
Allow HFT with restrictions:
• Order throughput
• Order trade ratios
• Cancellation restrictions
• Penalties / fees if broken
Possibly liquidity provider schemes focusing on HFT flows
Fees not focus to get maximum HFT flows
• All-in to get as
much HFT flow as
possible
• No or very limited
restrictions
• Fees focused to get
HFT flows
• Special liquidity
provider schemes
for HFT
NASDAQ NORDIC’S MEASURES
9
• World class electronic
surveillance SMARTS
• Order book Discipline OTR Limit
• Prevent un-intended price
movement
Volatility Guard
Nasdaq Nordic ahead of the curve • Tools and standard procedures apply to all market participants on Nasdaq Copenhagen
EU regulation: • Common rules and guidelines in all markets • HFT is pan-European – measures should be pan-European
MEASURES
Limit on order to trade ratio to discipline the order book: • Introduced 1:250 in July
2011 • Adjusted to 1:100 in
December 2013 • Weight factor: Fee calculation
dependent of order proximity
to BBO.
Volatility Guard (Kursvagt) Electronic circuit breaker pauses trading in shares that drop or increase suddenly and greatly. For C20 shares deviation limit is 3 pct from last sale price and 10 per cent from opening price. Provides time-out for the market to reconsider price direction in single stocks
Document Title 10
SMARTS SURVEILLANCE SYSTEM MONITORING AND REPLAY CAPABILITIES
SMARTS SURVEILLANCE SYSTEM MONITORING AND REPLAY CAPABILITIES