“The only thing new in the world is the history you don’t know“, said by Harry Truman. A commentary that rings true even today in an era that Harry couldn’t have possibly imagined, where the rate of change has accelerated at a pace to stress our own comprehension, let alone anyone from Harry’s generation. However, I suspect if he were alive today he just might alter that statement to read, “The only thing new in the world is the history we don’t know and the present revealed before us”.
Over the past two weeks I have traveled to Chicago and San Francisco to attend and speak at Stacey Mankoff’s recent conferences. The events were focused on new markets, new regulations, strategies for build vs. buy and high frequency trading for Chicago and west coast trading firms. As a panelist at events such as these I try to set a goal to inform, educate and instruct in an effort to share my understanding of the industry so the audience can walk away with a positive sense that they’ve learned a thing or two. By the evening’s end and the trip overall I got a sizable dividend in return discovering numerous firm’s own investment in HF trading and perspectives on regulation.
The media frenzy is heating up once again on regulation and its impact on high frequency trading. Discussions of Dodd Frank, talk of new regulations for a transaction tax, surcharges on order cancellations, limit order minimum durations and of course the Large Trader rule that came into force just recently have caused the number of articles to reach hysteria levels. I would describe it all under the “Dead Cat Rule” – can’t swing a dead cat without reading or hearing something about the topic of regulation and HFT. Of course all of this was discussed at both of Stacey’s Chicago and San Francisco events.
It’s no surprise that regulators have drawn a bead on HFT firms; this is deeply rooted in the May 6th flash crash. That event drew back the curtain to reveal the fragile nature of the liquidity supply feeding our markets. HF firms in their quest for alpha whether takers or market makers never envisioned themselves as the lynchpin of market integrity, where traders and quants are responsible not only for the profitability of their firm but also to a degree are accountable for the orderly and fair operation of markets. Yet in the aggregate their influence and affect is obvious and thus all the attention of regulators (and the media chasing behind).
For the Chicago trader, the focus is talent, technology and tuning strategies. Many still rely on time-tested alpha strategies and simply look to fine tune them as markets restructure. It’s the underlying technology infrastructure that becomes a moving target. Most know that the evolution in technology goes hand-in-hand with innovations in trading. As for the talent, here’s a comment from a fellow panelist: “It’s easier to teach finance to a programmer than programming to a finance guy“. The context of course is for algo development. From my perspective, it’s also very logical to make algo development tools more amenable to finance guys as well.
The attitude towards proposed regulation for the Chicago trader was one of “wait and see”. While there is obvious concern, the westward spread of regulation contagion fear has not happened. Since there was not much one could do in the interim, it is business as usual for Chicago’ites until regulation creates a disruption.
In San Francisco, it looks to be quite different. The issue is not concerns of regulation’s impact, but “how do I get into this HFT game?” If the firm’s I spoke to are representative of the west coast at large then the top priority is ways and means of launching into high frequency trading. They’re investigating where to begin that initiative; what technologies are needed? what are the build vs. buy decisions? which asset classes? etc. The “impact” concerns are centered around how HFT will disrupt their business models, trading styles and the associated costs. Regulation’s long arm is far down the priority list.
Yet the regulators heavy hand could produce a very different outcome. Over the past year there have been numerous controls enacted to reduce the chance of another liquidity starved crash and arguably improve market quality (reduce volatility, improve liquidity) through the elimination of stub quotes and the addition of circuit breaker trading halts and limit up/limit down price collars. But in chasing that elusive goal of market integrity recent talks of a transaction tax, order cancellation fees and/or minimum resting periods for limit orders could change the game completely. Existing firms hit with new regulations will likely close down and new entrants will think twice when they consider the costs and the lowered margins.
The perception is HFT firms have a technological advantage, yet technological change is multi-dimensional it relates to all participants; buy-side, sell-side, HFT, exchanges and brokers. In an effort to swing the balance back in their favor the sell side is combating (HFT) technology with technology. I spoke with a sell-side firm in San Francisco that has revamped their block trading algos to disguise them from the HFT liquidity detection schemes, a move similar to Deutsche Bank’s new Stealth Algo. Market integrity ultimately will be based on creativity and its innovative application to technology in trading.
Harry Truman was known for his straight-shooting style. Yet in this simple comment, “The only thing new in the world is the history you don’t know” what I think he was really saying is the lessons of history have much to teach, so much of what has the appearance of newness has been done before by past generations. Granted we live in an era of fast-paced technological change but driving that change is still the human mind.
Once again thanks for reading.
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