Up and Down Week for High-Frequency Trading

The reputation of high-frequency trading (HFT) seemed to swing as erratically last week as stock prices did last month. A survey found most traders wary of HFT; but some on Wall Street stood up for it; but the European Union. still wants to tame the technology.

First Down ...

Large scale dark pool operator Liquidnet polled of more than 300 global customers over the summer, finding widespread concern about market effects of HFT. Two-thirds of respondents in North American were worried about HFT, 60 percent in Europe and more than half in APAC -- though HFT is not so popular there.

Almost three quarters of traders at the top five worldwide firms consider HFT an urgent market-structure issue, the survey indicates, with more than half of those polled uneasy about market-impact costs. Survey respondents manage more than $13 trillion in total assets via mutual funds, hedge funds and pension funds.

“Investors are clearly concerned that their long-term investment styles are at odds with the speculative, nanosecond profit-taking approach utilized by high-frequency traders,” Seth Merrin told The Wall Street Journal. Liquidnet’s founder and chief executive added that the survey demonstrates traditional investors’ enormous hostility toward HFT.

The study comes as HFT grows in both prominence and controversy. Lightening fast equity transactions within tiny fractions of a second lift trading costs for traditional players and intensifies market volatility, according to critics.

Then Up ...

Despite a regulatory report that found HFT not at fault for the Flash Crash on May 6, 2010, extreme market fluctuations last month put HFT back in the crosshairs of politicians and even some investors. But regulators haven’t weighed in much beyond a few warnings.

And that’s a big problem for the NYSE Euronext COO, who called on authorities last week to definitively declare what they think about HFT so that traders of all stripes can put the controversy behind them.

“What it really takes is for the regulators to actually make a statement that says ... either we don’t see a problem, so everyone should stop waving their hands; second, we saw a problem with participants and we are disciplining them; or third, we think there are problems and we’re going to do some regulation,” Lawrence Leibowitz said. “But the ominous silence of the regulators allows the fanning of the flames.”

The silence and HFT’s growing prevalence, that is. HFT could be a part of more than half of U.S. equity trading in the U.S., according to the Chicago Tribune.

The U.S. Securities and Exchange Commission has already adopted a “large trader” rule aimed at exposing more HFT operating information. Meanwhile, the European Union is looking at ban-worthy HFT strategies that amount to market manipulation.

Back Down ...

“There are particular automated strategies that have been identified by regulators which, if carried out, are likely to constitute market abuse,” said a European Commission document quoted by Bloomberg News. “Further identifying abusive strategies will ensure a consistent approach in monitoring and enforcement by competent authorities.”

On the European Commission’s list of no-no’s are layering, launching disingenuous large orders with no execution; quote stuffing, attempting gains by holding up data feeds; and spoofing, profiting from fooling systems into making vulnerable decisions.

The European Union is drafting legislation to allow officials access to real-time data flows as part of an effort to upgrade financial regulation before next month’s reform of market abuse law, according to Reuters. The end goal is to keep pace with racing technology, including HFT.

Up Again?

European markets closed on an upswing Friday. Controversy aside, financial stocks led the way, according to The Wall Street Journal. They were optimistic that officials would take significant steps toward resolving the debt crisis before Monday.

Whether HFT’s reputation ended on a high or low note, at least the market ended on a good kind of swing.