• Definitions: terms such as “algos”, “HFT”, “tactics” or “systematic algorithms” can be used very inconsistently. The white paper compares and contrasts the various automated and algorithmic strategies, bringing clarity to controversial topics such as the distinctions between algorithmic and high frequency trading , the impact of gaming, and the role of smart routing.
• Locations: maturity in algorithmic trading typically depends less on who you are than on where you are geographically. We look at the large differences between the USA, with its highly fragmented market and an estimated 60%+ of trading being automated, and Asia Pacific, where fragmentation is nascent and screen trading still prevalent.
• Players: with specialized brokers competing aggressively, smaller firms considering whether they should build their own algos or use others’, and other players still wondering if they need algo trading at all, the complexity of the map is evident.

Download the white paper Algorithmic trading: a complex map now to find out all you need to know about “Algo trading”. After addressing definitions, locations and players, the paper outlines how you can embrace the automation of trading, and discusses the major ‘build versus buy’ considerations and the technologies employed.

In September 2011, a UK Government Foresight panel forecast that “The number of human traders employed in the financial markets is set to fall dramatically over the next ten years as banks and brokers become increasingly reliant on computer-based algorithms to run their trading operations”. So it looks like the trends described in this paper are set to continue!

Please share your feedback! How is algorithmic trading shaping your business?

While you’re here…

• View the Valdi Algo Trading suite and related global trading solutions
• See all recent Global Trading thought leadership papers

Does any of this sound familiar?

In the global financial markets we have a burgeoning number of secretive, high frequency traders who are spending untold millions of dollars on their obsession to shave fractions of a millisecond off their round-trip times. Tricks of the trade include venue co-location, straightening the fiber-optic cabling from Chicago to New York, printing logic directly onto silicon chips, and intensive use of complex computing to identify pricing anomalies across an expanding range of asset classes. These firms grew both in number and dominance since the turn of the millennium while regulations barely registered (or controlled) their emergence. Imagine a world in which Formula 1 cars are allowed to drive on the nation’s highways!

On May 6th 2010, however, the world changed when the Dow went into free-fall only to bounce back minutes later. Nine months on and the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues recently issued a report containing 14 recommendations following the crash which – like the FIA’s rules – can be read to be a mixture of safety and fairness considerations. Market safety recommendations include the extension of circuit breakers and closer scrutiny of pre-trade risk checks, while fairness is addressed by proposals to review payment for order flow arrangements, and to investigate varying venue maker/taker fees to incentivize continued liquidity during periods of market stress. The committee does not suggest that high frequency traders caused the crash, but their conclusion is that their presence (and withdrawal at the critical moment) amplified the market swing, and that by extension their participation in the market should be controlled more tightly in the future.

So will the financial markets ultimately adopt regulations similar to Formula 1?
Can fairness be achieved by regulations governing the power or size of an algorithmic engine, or mandating the minimum length of cable between it and an exchanges matching engine? I don’t think so. But what is clear is that the regulators are taking an increasingly concerned view of the rapid evolution of market structure, and are seeking to impose greater discipline and specific, measurable controls on their operation. The financial impacts of these recommendations are likely to be felt most by the high frequency community whose ability to win may rely on technical advances which are curtailed by new regulations – much like the challenges faced by Formula 1 racing teams.

At this point it is not clear what the future holds, but we will most likely continue to see increased regulatory change for many years to come, and that these changes will focus on standardization and controls designed to promote fairness as well as safety. What does this mean for the high frequency trading community? Well I’ll leave you with one final Formula 1 fact that paints a gloomy outlook. There are just 12 teams racing in the 2011 season – a thirty year low – and all of their cars are powered by just four engine manufacturers. Why? Sixty years of increasing regulation and an accelerating technical arms race have taken their toll, and made it exponentially more difficult (and expensive) to win with consistency. Teams have been forced to slash costs and/or face bankruptcy or sale. Is this the start of the end for the high frequency trader?

* The summary report from the joint committee can be viewed at http://tinyurl.com/4ghahyn

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