SIX chief exec calls for industry to educate public about HFT
Market operators have a duty to educate the public about stock markets – and to take widespread concerns about the role of high-frequency traders seriously, according to Christian Katz, chief executive at SIX Swiss Exchange.
“We have come from a time when human risks were huge, to an era when these have largely been replaced by technological risks,” he said. “We have to keep criminals at bay, otherwise a market loses its reputation and its function in an economy.”
Financial research house TABB Group currently estimates that HFT accounts for around 40% of trading activity in Europe and around 60% in the US. Most exchanges and trading venues have actively courted HFT in recent years, on the basis that it drives up trading volumes and therefore increases their profits. Supporters also contend that HFT has increased liquidity and helped to provide investors with narrower spreads, therefore lowering the cost of trading.
However, Katz acknowledged that a significant portion of the general public, including long-term investors, is deeply sceptical about the benefits of HFT. “The public is really concerned about HFT,” he said. “It’s not just a lack of understanding. The general public believes that HFT is operating at such incredible speed that the system is like a formula one car that does not have adequate brakes. There’s also a fear the machines are doing front running, and a perception that HFT is just empty trading that is taking money from real investors such as pension funds. We have to take this seriously.”
Citing malfunctions such as the Knight Capital disaster, in which an error in its market making algorithms caused a $400 million loss, and the infamous ‘flash crash’ stock market collapse of May 2010, Katz called for more protection against market abuse, including the regulation of all market participants without exception.
Long term investors have often objected to HFT, with some senior buy-side observers characterising HFT firms as predatory “vultures” that feed on institutional flows. Other commentators have expressed deep concern that the fragmentation of Europe’s equity market structure since MiFID has created opportunities that can be exploited by unscrupulous and manipulative trading strategies.
Regulators and exchanges in France, Italy and Germany have introduced or are currently introducing measures to control HFT, including financial transaction taxes, fees for firms that cancel more than a set proportion of their orders, and obligations for HFT firms to submit their algo trading strategies to the regulator. Yet even so, fears have remained widespread that regulators such as Europe’s ESMA simply do not have the resources or the expertise to keep pace with the advance of technology. According to Katz, that is a dangerous situation, because it prompts politicians to intervene in the regulatory process with little understanding – often producing results that are counterproductive.
“Even in formula one, you might have the best driver and the best car, but the team that performs best is the one where the mechanics and supervisors work at the same quality and speed,” said Katz. “We at exchanges need to explain how markets work to the young generation in schools and universities. If they don’t understand what’s happening, we will lose them in five or ten years when we want to make sensible changes. It is our duty to educate the public, and to treat market maker products with care.”