Earlier this week New York Attorney General Eric Schneiderman announced plans to probe high-frequency trading (HFT) and curb services that are provided to these traders. Richard Bentley, vice president at Software AG spoke with Traders and expressed his view on the probe and hft.
“High-frequency trading has become the bogeyman of the trading space – and its reputation is not entirely undeserved,” Bentley said. “Some HFT firms are stubbornly reluctant to incur the latency overhead of robust pre-trade risk controls or the delay in getting to market that rigorous testing and validation requires.”
As a result, he added those firms then take the chance that their execution and trading algorithms can go rogue, and when they do cause a debacle, such as happened with Knight Capital, HFT gets the blame.
“Maybe it’s more accurate to assign blame to the traders, developers, risk manager and supervisors who ignore safety in the name of profit,” he said.
Furthermore, Bentley believes that algorithmic and high frequency trading are beneficial to global economies – by adding liquidity, lowering trading costs and providing more competitive prices. While restricting usage may have undesirable consequences, he argues there is certainly a case for mandatory pre-trade risk practices, along with comprehensive market surveillance and monitoring to detect those who refuse to comply.
“In a nutshell, you need algorithms to monitor trading algorithms if regulators are to detect and – better – prevent compliance breaches,” he said. “Unless HFT firms take steps to regulate their own activities the regulators will step in with draconian measures – as we are seeing being suggested around the globe.”