Remember them? They were guys who supposedly caused the May 2010 ‘Flash Crash’ but it turned out they did not. Vilified in the press and on Capitol Hill for at least two years, high-frequency traders lived to fight another day after the market witch hunt, becoming respected liquidity providers in today’s evolving market structure.
Kirsten Wegner, Chief Executive Officer at Modern Markets Initiative, an industry investor trading advocacy and education group, said in an interview that HFTs during the first quarter of 2019 – affected by COVID-19- provided reliable liquidity to the markets in a time of high volatility and stress.
But what about the argument that HFT actually add to market stress and volatility?
“What we know is that automated traders are there to match buy and sell orders in real time and that is actually a stabilizing force in the market,” Wegner began during an interview on the TD Ameritrade Network, “and to make sure there is dependable liquidity there. If they hadn’t been there over the past two months bid-ask spreads would have been much wider which means investors would not have gotten the best price.”
Wegner said that HFT firms were at the ready with rapidly deployable technology that was “ready to go” at a moment’s notice amid the most recent spate of volatility – especially given the fact broker-dealer trading floors were closed as were some exchange trading floors.
“HFT firms will continue to provide dependable liquidity andd capital markets will continue to operate properly and efficiently,” she said. “we’ve seen that the trading technology over the last decade has matured to a point where the markets can function efficiently even remotely – when the brick and mortar floors are closed.”
She further added that the liquidity HFTs provide is dependable – and the fear of liquidity drying up during times of heightened volatility, has was the case during the 2010 ‘Flash Crash’, is no longer applicable.
“That’s the last thing you want to see,” she said, remarking on market induced liquidity reduction. She pointed to a graphic from an HFT ETF market maker how its trading volume rose during times of extremely volatility as other firms withdrew. “They (the HFT) had a more important role here in providing liquidity.”
And its not just those HFTs that are designated market makers, Wegner said, but other HFTs are filling the role of liquidity providers even when the “knife is falling.”
As for the future of HFT, Wegner said these firms and technologies will continue to grow and develop into other asset classes, such as ETFs, and into other geographies such as Asia and developing countries. She also said there could well be more consolidation within the automated trader industry as well.
Future Of High-Frequency Trading