Monthly Archives: July 2015

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Flash Boys Welcome: World Exchanges Woo High-Frequency Firms

by Sam Mamudi, John Detrixhe, Benjamin Bain | Sunday, 12 July 2015

Hey there, flash boy.

Exchanges around the world are avidly wooing high-frequency traders, those controversial speed demons of Wall Street.

Despite the often explosive debate over this kind of trading in the U.S., bourses in Mexico, Turkey, South Africa and beyond are trying to lure HFT types to boost business.

The message is clear: whatever the perceived risks, algorithmic robot traders — algobots — are marching steadily across the globe.

“We are welcoming foreign investors, and that includes HFT firms,” says Muammer Cakir, managing director at Borsa Istanbul.

For many exchanges, the attraction is obvious. Algobots buy and sell faster than a blink, boosting overall trading volumes. Higher volumes, in turn, help attract investors, creating a virtuous circle that benefits the exchanges.

To its advocates, high-frequency trading is nothing short of a revolution, making trading faster, cheaper and more efficient. They’re the modern market makers, replacing the men in blazers standing by their posts. To its detractors — among them author and journalist Michael Lewis, who added “flash boys” to the Wall Street lexicon — HFT lets savvy practitioners profit unfairly at others’ expense. U.S. authorities have voiced concerns and some are investigating the industry.

Many exchanges are unbowed. So far, high-frequency traders have a negligible presence in Istanbul. But Cakir’s exchange plans to upgrade its stock trading systems in September in the hope of attracting more HFT business, and it plans the same for its derivatives platform next year.

Close Computing

Borsa Istanbul also is letting traders place their computer servers next to exchange systems -– a practice known as co-location -– to facilitate HFT trading. The ultimate plan is for more institutional and foreign trading, and it’s betting that HFT activity on its venues will help make that happen.

The Tokyo Stock Exchange is taking similar steps. TSE officials last month visited New York to let the HFT industry know about upgrades due in September to its Arrowhead trading engine. Arrowhead already matches orders more than 1,000 times faster than was possible five years ago.

Tokyo has been helping high-speed traders in other ways. In the past two months, Susquehanna International Group and KCG Holdings Inc., gained “remote membership” at Japanese bourses, the first approvals since authorities opened up the possibility in 2009. The distinction allows firms to place buy and sell orders directly on the exchange.

The Hunt

Critics of high-frequency trading in the U.S. and Western Europe say that the fragmentation of those markets into multiple venues has allowed the algobots to hunt for profitable trades across several platforms, a strategy coined latency arbitrage.

In places like Tokyo, by contrast, exchanges are still largely monopolies. More than 90 percent of Japanese stock trading takes place on the TSE, for instance. And the single market hasn’t kept HFT out, which makes up about 44 percent of transactions.

The dominance of a single exchange in many Asian markets may have helped high-frequency traders avoid some of the controversies that have dogged them in the U.S.

“There hasn’t been this historical antipathy toward HFTs as being predators,” says Michael Syn, head of derivatives at Singapore Exchange Ltd.

Ill Will

Still, there’s plenty of ill will to go around. The algobots are fast replacing human traders, and in the U.S., high-frequency trading today accounts for at least half of all stock trading. Critics say HFT not only gives its practitioners an unfair advantage but can also unsettle markets. If the algobots pull out of a market all at once, their retreat might exacerbate sudden swings.

Various U.S. agencies have examined high-frequency trading but have found no evidence of widespread wrongdoing. This week, U.S. officials released a report concluding that in the Treasury market, HFT firms contributed to wild price swings on Oct. 15, 2014.

The exchanges, for their part, say hyperkinetic high-frequency trading ultimately narrows the differences between the prices at which people buy and sell and also improves trade execution. That in turn encourages trading by long-term investors.
“They’re not necessarily bad,” says Eduardo Flores, vice president of market supervision at Comision Nacional Bancaria y de Valores, which regulates Mexico’s financial system. “They’re market makers and in a certain form they help it so there’s more liquidity.”

In Mexico, the bourse is trying to attract more high-frequency traders to boost volumes, said Luis Carballo, the top information technology official at the Bolsa Mexicana de Valores SAB, which operates the exchange.

Mexico’s Wants

About 70 percent of the stock trades on Mexico’s national exchange already involve HFT, Carballo estimates. He said the Bolsa is analyzing how to make its market data platform more efficient.

“What we want is more trades,” he says. “We prepare the system, the technology, so that the possibility of doing high-frequency trading exists.”

Mexico exchange executives flew to New York last month for one-on-ones with clients of local brokerages, crisscrossing Manhattan to meet with algorithm coders, traders and others who use the Bolsa’s market data. They also met with officials from other exchanges to share ideas and expertise, according to Alfredo Guillen, the chief operating officer for equities at the exchange.

“We went specifically to speak about market data,” Guillen said in a telephone interview from Mexico City.

Meetings recently have become more focused on connectivity for traders as high-frequency trading has grown more common, according to Guillen.

Trading Catalyst

JSE Ltd., the company that operates the Johannesburg Stock Exchange, opened a co-location facility in May 2014 that cut the time it takes for data to travel from a trader to its servers and back to 150 microseconds, from 2,550 microseconds. Stock transactions rose 19 percent last year at the exchange and in October it had a record month, with daily average volume close to 400,000, about a third higher than its previous best.

“As part of our revenue-growth strategy, we engage in business origination where we seek new flow from a variety of market participants — buy side, sell side, retail as well as firms that employ low-latency trading strategies, also known as HFT players,” said Donna Oosthuyse, director of capital markets at JSE.

For more, read this QuickTake: Trading on Speed

Perhaps the last big obstacle to high-frequency trading achieving global dominance is China, where tight government rules, a stamp duty on stock trades and market inefficiency have so far kept out the algobots. There may be signs of opening up, though: Doug Cifu, CEO of Virtu Financial Inc., one of the world’s biggest computer trading firms, said on an earnings call in May that Virtu was having “very significant preliminary discussions” about entering the Chinese markets.