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Blockchain Offers Banks Potential, But HFT Provides Benefits Now
Traders Magazine Online News, March 21, 2017
I’ve been a technology nerd since before it was cool. In fact, when I went to college in the mid-1970s engineering students were treated more like George McFly than Mark Zuckerberg. It wasn’t the most glamorous major to talk about.
Not much has changed today when I tell people I lead an advocacy organization in support of high frequency trading (HFT), a technology that lowers trading costs for banks, asset managers and pretty much all investors. I find the work exciting, but I do run into my share of Biff Tannens.
So, I’ve been surprised, and admittedly a little envious, of the genuine enthusiasm and support generated by blockchain. As one industry observer put it, hype around blockchain “has managed to make that boring back-office coordination work sexy”. It’s received so much publicity I’ve felt like saying “hey, while blockchain may be the next big thing, we’re supplying cool technology to banks right now!”
Well, maybe I wouldn’t go that far, but high frequency trading technology is already being pressed into service in the banking industry in a big way. From joint ventures to partnerships to outsourcing relationships, tech-savvy bankers and traders have caught on to the worst kept secret on Wall Street – high frequency trading makes their jobs easier! Put more eloquently – banks that leverage high frequency trading capabilities can provide even better pricing and liquidity to their customers.
This statement shouldn’t be all that surprising to those that closely follow our industry given the leading role that high frequency trading has played in improving market quality over the past decade or so. During this period, retail commissions have fallen by more than $20 per trade and bid-ask spreads have collapsed, leaving more room for investors to profit. I could go on and on, but you get the point and so have some of the world’s biggest banks.
While these financial institutions are grappling with tougher regulations, rising technology costs, and a number of global economic hurdles, high frequency trading has quietly become a critical ally. It has changed the way that banks, and even asset managers, are interacting with their core customers on a daily basis.
Don’t get me wrong. These firms continue to do what they do best – provide scale and maintain long-standing client relationships. But working in tandem with nimble, high frequency trading professionals – innovative firms that focus solely on utilising their electronic trading prowess to offer tight pricing – is changing banking, allowing such firms to operate the same capital-intensive businesses with a lower cost base and a potentially higher margin.
Consider the following examples:
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