Last week I was moderating at the High Frequency Trading debate at the World Exchange Congress in London. A conference with HFT as a subject has rarely been more timely with politicians seemingly intent on driving the business out of business. The regulators are the politicians servants and they have been busily working towards creating a regulatory environment that has the good intentions of protecting the integrity of market pricing, whilst retaining the upside benefits of shortened spreads, increased liquidity and profit.
It is the profit aspect that tends to get up most non-trading noses, where the perception is that HFT profit is retained by relatively few players. But to counter this concern, one should consider that taxes are collected because of the profit (Assuming no tax avoidance schemes are in place but that’s another story).
Markets operate best when a balance is found between risk and reward and in HFT we find a market that has not yet found this balance. It is sheer stupidity to ban HFT or even restrict it as it could do great harm to the markets and ultimately the investors. The challenge therefore is for the markets to adapt and accommodate HFT enabling a fair split of benefits and profits in the market. In reality there has been already been a fair division of benefit and profit throughout the market because of HFT. It’s just not visible to all and difficult to assess within any particular market segment. The best way to value HFT might be to imagine if it did not exist?
Would the overall market be better or worse? In my view much worse!
I have grave doubts that the politicians and regulators have the necessary knowledge or understanding of markets and HFT to carry out an accurate assessment. Rather they play to the gallery and quite frankly HFT is a very easy target.
In today’s markets we find globally, a shortage of liquidity in virtually every aspect of financial investment. The likelihood is that liquidity will continued to be squeezed from the balance sheet through to collateralisation and investment. It would be ludicrous to add execution liquidity to the list when we need to find ways to increase liquidity.
Economic growth will not happen in times of liquidity shortage and at a time when more investment is required. Corporates and the rich and famous must be enticed into the markets. These are deep and profound issues that look to me to be treated by politicians in a piecemeal manner, when joined up thinking and strategy is called for.
What is certain is that no single conference or debate will find the answers, but by golly politicians should try and understand the complete picture and not be seduced by votes or by yes men civil servants.