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.

Automated Professional Trading, High Frequency Trading, High Frequency Trading, Investors, The Latest Blog

The Technology Investor: "Indispensable" HFT Mitigates Risk

In a piece for Casey Research’s The Technology Investor, senior editor Doug Hornig zeroes in on some of Flash Boys author Michael Lewis’ most questionable claims about HFT. He also settles the score about HFT’s role in the flash crash of 2010, seeks to settle misplaced fears about HFT, the role it plays and whether or not the markets are “rigged.”

In discussing what actually causes major market disasters – and HFT’s true role – he writes:

Well, consider this: Market disasters generally result from risk that exceeds supportable levels. The collapse of ‘08 was triggered by the trading and re-trading of mortgage-backed securities that couldn’t be accurately valued. With each trade, the risk was magnified some more, until it finally overwhelmed the system. Or take the dot-com crash, which came about because the price of revenue-free startup companies was bid so high that the risk of continuing to hold them blew way past the probability of selling to the next sucker in line.

HFT, on the other hand, is about the exact opposite—mitigating risk.

And on the flash crash:

As a market stabilizer, proponents say, HFT has become indispensable. They point to the infamous Flash Crash of ‘10, which took the Dow down nearly 1,000 points in 20 minutes.

 The trigger for that was a simple human error. HFT quickly re-priced securities and stair-stepped them back up to their proper levels, it is argued, thereby reversing the crash before it could spin entirely out of control.

Hornig’s piece is a frank look at recent HFT criticisms combined with an easy-to-understand translation of what actually occurs in the markets. Through his piece he shows how HFT benefits investors, today’s modern markets and establishes that it is not something to fear.

Check out more of the best lines from his piece, “How I Learned to Stop Worrying and Love High-Frequency Trading” here.

High Frequency Trading, Investors, The Latest Blog

FACT CHECK: "Average Joe" Investors and the Benefits of HFT

A recent commentary piece in The Guardian about the “Average Joe” investor contained a number of inaccuracies regarding high frequency trading and electronic markets.

MMI senior advisor Peter Nabicht reviewed the commentary and set the facts straight, giving the piece “the Walmart treatment“:



The Modern Markets Initiative has many resources available to members of the media, regulators, lawmakers and end investors who want to learn more about our electronic markets. Please visit our Investor Benefits page and watch our “What is High Frequency Trading?” video to learn more.


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.

High Frequency Trading, The Latest Blog

Payment for Order Flow and Trade-At Rule Crucial to Maker-Taker Discussion

A recent article in the Wall Street Journal, “Regulators Weigh Curbs on Trading Fees,” correctly explains that exchange-charged trading fees, including the “maker-taker” fee plan used at many U.S. Equities exchanges, is a part of market structure that some regulators and other market participants are interested in reviewing. However, the article and its accompanying explanatory graphic could imply that the maker-taker model only provides rebates to high frequency trading. This is not true and needs to be clarified to prevent further incorrect assumptions of unfair advantages.

Explanation of Maker-Taker

Maker-taker is quite simple: the resting (passive) order receives a rebate, while the order that crosses the spread (aggressive) pays a fee. The rebate is offered to the passive order to encourage displayed liquidity. The difference between the fee and the rebate is revenue kept by the exchange.

In the maker-taker model, the fees are not only paid by certain types of traders, just as the rebates are not only gathered by certain types of traders. Any resting order – no matter what type of strategy or entity placed it – receives the rebate at the time of the fill. In fact, many brokerages have developed algorithms that allow them to efficiently work their customers’ orders passively, thus collecting rebates and avoiding paying fees when getting filled. Some of these brokers pass the rebates received on to their clients, but many do not. It is because many brokers keep the rebate gained from the order that, as the article points out: “A primary criticism is that the fees pose a conflict for brokers, who might choose to route an investor’s order to an exchange with the goal of earning a payment, not to get the best deal for the client.”

Why HFT Does Not Rely on Maker-Taker

High frequency trading is often linked to maker-taker because many high frequency trading strategies rest their orders and at many exchanges it is the resting orders that receive the rebate. However, it is important to know that HFT strategies do not rely on the rebate to be profitable. There are some equities exchanges that have an inverted pricing model referred to as taker-maker. High frequency trading is still used to rest orders on these exchanges, even though the resting order pays the fee and the order that crosses the spread gets the rebate. Furthermore, high frequency trading is used extensively in markets that offer no rebates. In most, if not all, futures markets, both orders in a transaction pay a fee and strategies using high frequency trading are prevalent in these futures markets. As noted in the Wall Street Journal article, this is why many experts say “It isn’t clear if a ban of maker-taker would harm high-speed traders.”

The maker-taker pricing intends to incentivize displayed liquidity on the lit exchanges that use it. Displayed liquidity allows for a publicly viewable continuous negotiation for fair prices and is an important aspect of transparency in today’s modern markets. However, this does not mean the markets should be wed to maker-taker. Rather, it means that maker-taker should not be evaluated in a vacuum. There are other important aspects of market structure that should be considered in any discussion of maker-taker.

Difference Between Rebate and “Payment for Order Flow”

Maker-taker often comes up in conversations around “payment for order flow”, which MMI has previously addressed. Many consider the rebate as being similar to payment for order flow because exchanges are using rebates to entice order flow to their exchange. However, there is one key difference: orders that receive a rebate from an exchange are transparent and visible to all whereas most payment for order flow ends up with the orders being internalized or transacted on dark pools, which does not aide in public, transparent price discovery. There is a valid concern that if maker-taker was banned from the market but payment for order flow is allowed to persist then we would see even more orders and volume move from transparent, lit exchanges into the dark of internalization.

“Trade-At” Rule for Dark Pools

Similarly, maker-taker often comes up in conversations around a “trade-at” rule for dark pools and internalization, as explained in the article. The reason for this is that dark pools and internalization can match orders at slightly better prices than the exchanges’ displayed best bids and offers. In maker-taker the rebate to the resting order is similar to this small price improvement, so it allows exchanges to compete with dark pools for liquidity. Without maker-taker there is a fear that there would be a greater flight of liquidity away from lit exchanges and into the dark.

A trade-at rule could combat this flight of liquidity, by requiring dark pools and internalizers to only match if there is substantial price improvement, such as mid-point matching. A mid-point match is less likely to occur than a match that offers only slight price improvement because resting orders will most likely not want to sacrifice that much of the spread. Without a trade-at rule a ban on maker-taker could force more volume to the dark, but with a trade-at rule we could see much of the dark volume shift back to lit exchanges. This is why KOR Group LLC, the financial-market consulting group, mentioned at the end of the article is right to tell SEC officials that the two rules must be discussed in unison.

High frequency trading brings many benefits to the market and can continue to do so without maker-taker pricing in place. However, maker-taker is one of the few remaining incentives exchanges have to attract displayed liquidity. The rebates have no discrimination, are distributed to all matched resting orders, and allow exchanges to compete with dark pools for liquidity. In reviewing maker-taker, it is crucial that we also consider other market structure issues such as payment for order flow and trade-at; otherwise we run the risk of damaging our markets when we should be working to make them better.


High Frequency Trading, High Frequency Trading, The Latest Blog

Just Calling it HFT Doesn’t Make it HFT (Part II)

It has become increasingly clear that the term “high frequency trading” (HFT) has been appropriated and turned into a catch-all phrase for electronic trading behavior people just don’t like. That doesn’t mean, however, that correctly using the term HFT should be avoided or that we need another phrase to accurately convey the practice; there is nothing troubling or negative about trading with a frequency greater than others.

But what is troubling is the common practice of conflating negative and even illegal trading behaviors under the term HFT. This promulgates numerous operating definitions of the term, prompting confused and often ill-informed discussions around HFT. To ensure effective discussion and helpful criticism of today’s markets, those instances must be corrected.

The recent comment letters to the CFTC concerning their “Concept Release on Risk Controls and System Safeguards for Automated Trading Environments” contained more than a few misunderstandings and misappropriations of HFT. A letter from Better Markets made a series of definitive statements about HFT that do not accurately reflect the role HFT plays in the markets. Why? Better Markets states in a footnote to their letter that they use the term HFT to refer only to manipulative and disruptive trading practices:

“While there are of course algorithmic trading strategies that are not considered manipulative or disruptive of their given markets, for the purposes of this comment letter “high frequency trading” and “HFT” refer to those disruptive high-frequency automated trading strategies as described herein.”

Better Markets also wrote:

“strategies which count as illegal manipulation when performed over the course of minutes or hours should also not be permitted when they take place within milliseconds. Moreover, practices that are clearly illegal if done by human beings should be equally illegal if done by computers.”

It is very clear that they are addressing manipulative and disruptive behavior, whether done at low latencies or by humans. One would be hard-pressed to disagree. All responsible market participants, many of which use HFT, want to do away with manipulation.  However, by wrongly equating all HFT to manipulative behavior, Better Markets has muddied the water. If we are to successfully address manipulative behavior in the markets, whether executed by computers or humans, we must be clear and precise.

The inaccurate application of the term HFT to only manipulative and disruptive trading practices is not the only place we see the conflation of the term. In recent weeks there has also been a good deal of confusion between news arbitrage and HFT. The number of news releases when compared to overall market activity is small. The number of impactful, market moving releases that come out while the markets are still open is even smaller.

The very fact that these events are infrequent does not allow for them be traded with a high frequency, meaning, by definition, one would not think to apply the term “high frequency trading” to these events. Yet, institutions as esteemed as the Wall Street Journal and the New York Attorney General’s office regularly confuse HFT with an infrequent news arbitrage. AG Eric Schneiderman stated that his office is “committed to ensuring a fair, stable, and transparent market. That means cracking down on the bad actors and encouraging industry leaders to step forward and self-police their industry.” Responsible market participants were encouraged by the statement, as they too want a fair, stable and transparent market that is rid of bad actors.

However, AG Schneiderman went on to say:

 “High-frequency traders who drain the value out of market-moving information in the milliseconds before it becomes available to other investors erode confidence in our markets and skim from the rest of the investing public, which hurts the entire market.”

Unfortunately this statement shows a misunderstanding of the issue at hand, alleging early access when it is unclear that was the case, and conflates HFT, a tool used throughout the industry, with an activity, news arbitrage, practiced by a small group of traders at an infrequent occurrence. Doing so creates two distractions: it distracts from the news trading issue at hand and distracts from the positive contributions HFT makes to the market.

Conflations such as these do a disservice to the investing public by ignoring the many benefits HFT brings to the market and rhetorically casting a common and legitimate trading tool in a narrow and negative light.

All responsible market participants, many of which use HFT, want to do away with the manipulative behavior taking place in today’s markets. The markets should be fair, stable, and transparent, benefitting all market participants. But until we accurately discuss the specific behaviors we need to remove from the market, rather than lumping them under the imprecise mantel of “HFT”, we will continue to struggle to identify the underlying causes of the challenges to today’s marketplace.

Click here to read Part I of “Just Calling it HFT Doesn’t Make it HFT” from MMI.



High Frequency Trading, High Frequency Trading, The Latest Blog

"Don’t Change the Players; Improve the Rules (and Quality) of the Game.”

In a recent blog post, Megan Morgan highlights the work of the Modern Markets Initiative to educate public audiences about the beneficial role of high frequency trading in electronic markets:

“It would come as no surprise that FINRA, the SEC and the CFTC have all stated that high-frequency trading regulation is a top priority for 2014.  In the wake of the Flash Crash, the rogue Knight algorithm and the various market outages in the summer of 2013, HFT and market infrastructure are hot- button issues.

“This could present a great opportunity for the entire industry – exchanges, traders and regulators – to put the proper safeguards in place to ensure that our markets are protected against manipulation and restore faith in a centralized, cleared, electronic financial system. In fact, firms that have been deemed ‘HFT’ by the media and regulators have started to organize groups such as Modern Markets Initiative, which is focused on educating the  marketplace on market structure and the benefits of algorithmic and quantitative trading, to ensure that if and when new regulations emerge, facts outweigh opinions. If regulators continue to use regulation as a way to lynch high-frequency trading, however, the goal to protect investors and increase the safety of the markets may be severely missed.”

In the piece, Morgan – a Vice President of Business Development at Eurex – also draws a distinction between good and bad trading behavior and the responsibility of regulators and all market participants to have a robust, fact-based discussion on market structure:

“Directing the regulations at the infrastructure rather than a particular type of trading may be the better solution. It does not require regulators to define high-frequency trading – which has never before been defined to everyone’s agreement. All market participants fall under the requirements (simple) and, as market conditions change, the rules can change with them. For example,  in Germany, HFT is defined as a firm sending 75,000 messages a day. Ten years ago, this would have been an astronomical number. Today, it can be exceeded by simply making markets; think about an options market maker that has to send quotes across the strip of options and across multiple expiries. Market makers are the very backbone of a stable market, stepping in when there are no buyers or sellers to prevent large swings in the market price – by attempting to regulate a few participants, regulators are essentially throwing the baby out with the bath water.”

Read Megan Morgan’s entire post here.