Benefits, High Frequency Trading, High Frequency Trading, The Latest Blog

Why You Should Thank High Frequency Traders for Lower Volatility

New data from Credit Suisse highlights how high frequency trading activity contributes to lower volatility in the marketplace.

As reported by the Wall Street Journal, “Researchers at the Swiss bank’s New York offices posit that HFT activity has helped inoculate large-caps from the effects of macroeconomic market stresses.”

Featuring graphics from the Credit Suisse note, the Modern Markets Initiative has created the below infographic to showcase these findings:


These findings from Credit Suisse are the latest in a series of research showing the many benefits high frequency trading and professional traders provide to the marketplace and end investors. For more, please visit the MMI’s Research & Studies page.

Benefits, High Frequency Trading, High Frequency Trading, News & Media, The Latest Blog

Chicago Tribune Editorial: "U.S. Financial Markets Need the Freedom to Innovate"

Amid the debate on U.S. market structure, the Chicago Tribune editorial board is urging regulators, lawmakers and industry leaders to recognize the many benefits technology and high frequency trading have brought to the marketplace:

Chicago was once famous for the open-outcry trading floors in which people stood shoulder-to-shoulder, buying and selling by scribbling down trades on paper cards. Computerized trading has pretty much stamped out that form of business….

Computers eliminated the floor trader’s insider advantage. That opened the markets to a wider world. Trading volume soared, much of it from the high-frequency traders.

Not only is high frequency trading making the markets more efficient and transparent than ever before, the editorial rightfully explains the competitive advantage automation technology provides to U.S. businesses and traders:

Approving rules that would drive the high-speed traders out of business, or slapping on a transaction tax that would strip the profit from their high-volume, low-margin trading, as some critics of high-speed trading have proposed, could stifle innovation, push a U.S.-dominated business offshore and, perversely, boost the cost of trading for everyday Americans.

The U.S. financial markets need the freedom to innovate. If they lose that freedom, competitors will supersede them in London, Tokyo, Hong Kong or who-knows-where. Competition has already made high-speed trading less profitable today than it was just a few years ago, as rival market participants invested in new technology and systems to counter the flash boys. Finance is not returning to the days of spit-drenched, open-outcry trading pits. Nor should it.

To improve the markets for end investors, they argue, a more holistic review of market structure is needed:

…No one in the securities industry seriously believes the flash boys should get a special advantage over other traders and investors. The question always has been how to encourage the high-speed traders’ contribution to efficient markets while ensuring fair prices and orderly trading for all.

That requires a balancing of interests and, given the pace of technological change, a continuous review. The exchanges and their regulators have shown a willingness to change the structure and rules of their markets. It is to their credit that they take a holistic, measured approach, rather than trying to tweak a rule here and there every time a big bank complains about the prices it receives on its orders.

Read the entire editorial on the Chicago Tribune’s website here.

Benefits, High Frequency Trading, High Frequency Trading, The Latest Blog

What is a SIP and What Role Should It Play?

This week it was reported that Nasdaq gave their two-year notice on running the SIP.

What is the SIP? SIP stands for Securities Information Processor. The name itself doesn’t explain it well. The SIP was created to be the central, consolidated live stream and aggregator of every exchange’s best quotes (bids and offers) being offered and trades. The data comes from all the exchanges, is processed, and fed back out as one stream of data.  Exchanges are prohibited by law from sending their quotes and trades to direct feeds before sending them to the SIP. In the highly fragmented world of U.S. equities, the SIP is a very easy way for people to get a quick view of the current state of the market. More importantly, the SIP acts as the benchmark used by regulators and others to determine the NBBO (National Best Bid and Offer).

The SIP has a long history. It was created by the 1975 amendments to the Exchange Act. At the time, there were several exchanges trading the same stocks at potentially different prices. So if your order went to the Boston Stock Exchange, their price might be better or worse than the price on the NYSE.  And for investors, it was difficult to get any reliable price other than the prior day’s closing price from the newspaper. The idea behind the SIP was to create a National Market System where investors and professionals would have access to real time price information. This was when access to real time quote information was difficult to come by, unlike today’s markets. So, whether or not the SIP has outlived its usefulness is a question worth asking.

Surprisingly, the United States is pretty much the only country that has a SIP. For example, Europe, Japan and Australia – which have competing markets – do not have SIPs.  Many financial tech providers offer aggregation based on direct feeds, both in the United States and abroad. So whether or not we need one is up for discussion.

However, if we keep the SIP it needs to get better. The market currently relies on it and it is outdated and slow. That is not a good combination. To be successful and useful, the SIP needs to be updated and made faster. Nasdaq has made recommendations on how to do this and is still waiting on approval from those who oversee the SIP.

It might be that Nasdaq is tired of waiting for sign off, and maybe this is ultimately a good thing. The SIP was originally put out for bid, why not do it again? In fact, why not open it up to competition and have a few SIPs? Redundancy would help with stability. Tech vendors already offer efficient, competing products that have probably surpassed the official feed in their capabilities. And if a tech vendor is making revenue, they will want to protect that revenue and grow it, so you can bet they would offer a solid, fast product.

And if the whole thing is run by tech vendors competing on service and price, we have to ask: do we need a mandated SIP? Or will a competitive market fill the need?