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The Future and Challenges of High- Frequency Trading

Popular as Algorithmic Trading, High Frequency Trading is a technology encompassing a sundry of strategies that estimates speed, trade volume, short timeframes, low latency and liquid instruments.

 
PRLog - Jul. 1, 2011 - A debate is looming over the most innovative application developed for the financial industry: high frequency trading (HFT). Popular as Algorithmic Trading, HFT is a technology encompassing a sundry of strategies that estimates speed, trade volume, short timeframes, low latency and liquid instruments. The black-box trading employs algorithms to execute trades at millisecond speeds, which is the wining factor here. Nevertheless, the loopholes in the market offer an upper hand to the HFT investors. Early in the trade, HFT gauges the flash orders, and intimidate slower investors to forego profits. HFT investors instantly acquire the profits and exit the trade swiftly to evade punishment for perjury.

A Financial News piece indicates the challenge with HFT:

"Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds. In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves."

Former NASDAQ chairperson Alfred Berkeley in a recent interview on Bloomberg maintains the viewpoint that HFT players are seeking short-term investments with quick profits, and are responsible for creating temporary imbalance in supply and demand chain. Nevertheless, HFT investors play a vital role in maintaining market liquidity. He believes by rebalancing the current structure skewed towards speculation rather than investment, flash crash can be prevented.

In the limelight of the May 6 flash crash in US markets last year, Financial Services Authority condemned the new rules on high frequency trading as proposed by the European Commission. Tim Rowe from FSA's markets division said: “Requiring regulators to look at every line of code in trading firms’ algorithms is not feasible. Regulators do not have the resources and experience to undertake this kind of role. It also creates a potential moral hazard; firms should have proper mechanisms in place for signing off algorithms and ensuring senior management is appropriately engaged in this.”

The European Commission proposed measures against flash crash include firms to explain their trading techniques, reveal minimum latency gap between orders and elucidate about the participating markets.

On the flip side, the Malaysian Stock Exchange - Bursa Malaysia welcomes the high-frequency trading firms and sees them as an opportunity to grow.
Tajuddin Atan Bursa, Chief Executive of Malaysia Bhd. said: “We have approved and increased the number of proprietary traders by threefold over the last month. It's a start. Once we have experience in that particular area, I think we might consider high-frequency trading.”

Algorithmic trading rules the roost in the cash equities markets, yet other chief asset classes like futures and options, and the FOREX market are enjoying the black box high frequency trading. The chief area of HFT development is the energy market, where, technology companies like ICE have opened their doors to automated trading.
The rapid progression in HFT is not far away from established neural trading platforms.

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