From Traditional Floor Trading to Electronic High Frequency Trading

Transcrição

From Traditional Floor Trading to Electronic High Frequency Trading (HFT) ‐ Market Implications and Regulatory Aspects
Prof. Dr. Hans‐Peter Burghof
Universität Hohenheim  Institut für Financial Management  Lehrstuhl für Bankwirtschaft & Finanzdienstleistungen
HFT has fundamentally changed financial markets…
Traditional floor trading
Modern high frequency trading (HFT)
 Amazon: More than 100,000 quotes per second in Amazon on June 7, 2013
 BATS IPO ‐ from $15 to 0 in 1.5 seconds: Stock begins trading at $15.25. Within 900 milliseconds from opening the stock price had fallen to $0.29. Within 1.5 seconds the price dropped to $0.0002. 567 trades were executed before trading halt.
 May 6 2010 , Flash Crash: DJIA plunges by around 1,000 points (9%) and recovers the losses within minutes
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… in the sense that
Today’s market environment
 Human are removed from the direct decision‐making process of security transactions and substituted by computer software
 Speed has become the single most important factor in security trading
 Fundamentals do not play any role for most high frequency traders
 Holding periods are often limited to milliseconds (10−3) or even nanoseconds (10−9)
The competitive advantage has shifted from those…  with superior capabilities in determining the “true” value of an asset
to those…
 who can trade faster than others!
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What is HFT?  HFT is a subset of algorithmic trading
Algorithmic
Trading
High Frequency Trading
 Definition of algorithmic trading in Mifid II:
Trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention
Typical features of HFT:
 Proprietary trading
Market making
Statistical arbitrage
 Spread Capturing
 Rebate Driven Strategies
 Market Neutral Arbitrage
 Cross Arbitrage (Asset, Market, ETF)
 Large number of orders with small size
Not only  Rapid cancellation of orders
one type of  No overnight positions
HFT but a variety  Very short holding periods
of different
Liquidity detection
Others
strategies
 Pinging
 Sniping
 Quote Matching
 Momentum
 Latency Arbitrage
 Manipulation (e.g. Quote Stuffing, Spoofing)
 Use of colocation and proximity services
 Focus on highly liquid securities
Strategies
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HFT activity
 Falling market shares of HFT (39% in HFT activity at regulated markets and MTFs in Europe in 5/2013
40%
Europe in 2012 according to TABB 35%
Group)
Value traded
30%
25%
20%
 Generally higher market shares of 15%
HFT in the U.S. (51% in in 2012 10%
according to TABB Group)
5%
HFT Activity
Turquoise
CHI‐X
BATS
Irish Stock Exchange
NYSE Euronext Lisbon
NYSE Euronext Brussels
NYSE Euronext Paris
London Stock Exchange
NYSE Euronext Amsterdam
Borsa Italiana
All Venues
0%
 Higher market shares at less regulated trading venues
 HFT activity has plateaued on established markets, continues to expand globally (e.g. Asia)
Source: European Securities and Markets Authority (2014): Report on Trends, Risks and Vulnerabilities
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Market implications – Market quality
Authors
Sample period
Brogaard et al. (2014)
Martinez, Rosu (2013)
08 – 10/ 2012
‐
Hasbrouck, Saar (2013)
10/ 2007 & 06/ 2008
Brogaard et al. (2012)
End of year 2009
Bias et al. (2011)
‐
Kirilenko et al. (2011)
Civitanic, Krilenko (2010)
Brogaard (2010)
06/ 2010 (Flash Crash)
‐
2008,2009 & 02/ 2010
Market
Method
Liquidity
Volatility
Price discovery
NASDAQ OMX Empirical
Stockholm
‐
Theoretical
NASDAQ
Empirical
NASDAQ, BATS
Empirical
‐
Theoretical
‐
‐
‐
E mini S&P 500 Empirical
‐
NASDAQ
Theoretical
Empirical
Overall, the literature tends to find that HFT improves market quality!
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Market implications – Market quality
Influence of HFT on market quality
Liquidity
•
•
Price discovery
Volatility
Based on traditional liquidity •
HFT traders tend to reduce •
HFT traders act as market measures HFT tends to volatility due to smaller price makers and hence can increase liquidity on the differences depending on positively affect price discovery
market market conditions.
But: The duration of liquidity provision is often short
•
•
But: Depending on market But: This effect seems to affect situation and strategy HFT predominantly short term traders can also strongly volatility deviate from that role
The proponents of HFT argue that HFT plays an important role in the price discovery process, leading to an increase in price efficiency => improved market quality
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Market implications – Negative externalities
The downside of HFT
 The “need for speed” harms “real” investments, market stability & fairness
 Speed has become the single most important factor in security trading
 Fundamentals do not play any role for most high frequency traders
Operational risk:
•
Quote stuffing
•
Sunshine liquidity
•
Sunshine market‐
Systemic risk
•
Flash crashes
making
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Market implications – Operational risk
The strong growth of HFT activity during the past decade lead to a sharp increase in the amount of quotes
 Why is this a problem?
 The placement of bids and asks via HFT can be compared with sending spam Emails
 In relation to sending and receiving it is practically free of charge for the sender but not for the recipient
 Forwarding and processing continuously increasing amounts of data generates increasingly problems and costs for trading venues and market participants and may lead to a breakdown of the trading system of individual trading venues.  HFT abuse the restricted capacity of trading venues and other market participants to handle continuously increasing data volumes:
 Speed wars aka quote stuffing aka fake liquidity
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Quote stuffing / fake liquidity
 War between HFT algorithms
 HFT place a large amount of quotes within a single second (e.g. 15.000 and more) and cancels it immediately
 Other market participants and trading venues have to process these quotes which takes time
 The HFT originator knows that his quotes are “fake” and neglects their processing. Yet, he analyses the reaction of the other market participants and waits for arbitrage opportunities when prices differ
 Quote stuffing is a main driver for system outages at trading venues
 Pure market manipulation!
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 Quote stuffing in Michal Kors Inc. (KORS) on Feb. 14, 2012
 KORS is stuffed with quotes from multiple exchanges exceeding 18.000 quotes/sec
 The picture shows about 40 seconds divided into 50 millisecond intervals
 Before KORS hand only a few hundred trades in the same time span
Source: Nanex
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Sunshine liquidity / Sunshine market‐making
 Burghof/Spankowski/Wagener (2014) find that trading activity on Multilateral Trading Facilities (MTFs) – where HFT are preferably active – reduces significantly in times of increased market distress.  Also when market‐making becomes difficult, market participants on MTFs –
presumably HFT – seem to reduce their liquidity provision.
 Hence, HFT is no big help for a sustainable efficiency in financial markets
Source: Burghof/Spankowski/Wagener (2014): Back to the roots – Market fragmentation and order routing
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Market implications – Systemic risk
Flash crash on May 6, 2010 in the DOW
 Trigger: Negative news of Europe/Greek ‐> new riots
 At 14:42:44:075 was an immediate sale of ~ $125 million worth of June 2010 eMini futures and a sale of nearly $100 million ETFs
 HFT did not trigger the flash crash, but their responses to the selling pressure on that day increased volatility
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Market implications – Summary
Critical in very volatile No real No fair market investments conditions for non‐HFT
market situations
Quote stuffing can reduce the quality of quotes and affect market quality negatively
Positive influence on No clear cut result can market quality
Improves price discovery
be drawn
Regulation?
HFT HFT strategies
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Regulatory aspects
In general, European (MiFID) and German aspects on German details:
HFT regulation seem to be compatible, both foresee:
 Stock Exchange Supervisory Authorities and BaFin
 Trading venue capacities have to be sufficient for HFT
receive increased enforcement powers (information  Excessive usage fees to be charged on all trading requests, prohibition of Algo trading strategies)
venues
 Order flagging to control HFT strategies (‐> Trader ID)
 Order‐to‐Trade ratios published by all trading venues
 High Frequency Traders are now subject to licensing obligation under German Banking Act
 Regulation and supervision of HFT as financial  Installment of circuit breakers at all trading venues services institutions by BaFin (‐> Prop traders now  Appropriate minimum tick sizes on all trading venues
also have to register)
Regulation on the basis of taxes has been seen critical by several scholarly papers. Deterioration of market quality in France and Italy where this regulatory practice has been used (e.g., Meyer et al., 2013; Gomber et al., 2014)
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From Traditional Floor Trading to Electronic High Frequency Trading

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