Automated and High Frequency Trading. Fredrik Hjorth Tieto, Stockholm October 20, 2011

Transcription

1 Automated and High Frequency Trading Fredrik Hjorth Tieto, Stockholm October 20, 2011

2 Present Day Situation 1/2 Post MiFID, 2007 November Many new execution venues for the same instrument Executed number of trades per order is increasing Fragmentation is now the norm Exchanges, MTF s, OTF s, SI s and Crossing Systems Prices can differ from venue to venue Value of position depends on source for end of day prices Cost Pressure Lower commission fees Do more with less Automation

3 Present Day Situation 2/2 A shift towards automation Manual intervention - Exception handling only New technology to find liquidity Smart Order Routing Consolidated order books Robotic Trading, Algorithmic trading and Smart Order Routing Arbitrage opportunities across market places Relies on slow reactions from others Fast reactions removes arbitrage opportunities Speed in this sense is relative and not absolute

4 Automation Is Not New

5 Nor Is Evolution!!

6 Today s New School is tomorrow s Old School Open Outcry vs. Electronic Order Entry Electronic Order Entry vs. Electronic Trading Electronic Trading vs. Automated Trading Automated Trading vs...??

7 Sales Trading Senior sales with a good performance record Handles large order assignments on behalf of clients (agency) Parent and child orders Similar to a proprietary trader The trader can be measured based on the performance of how well the order has been executed. High levels of commissions Still a good business, same people new tools

8 Algorithmic Trading Still agency business and not time sensitive Interday - Orders can be open over night Distillate of a successful trader s method Method becomes a set of rules = algorithm Sales people interacts with the client base to offer the algorithms at a lower price These are then executed as programs or strategies on a server connected directly to the execution venue.

9 High Frequency Trading Proprietary trading and clients trading in their own book Intraday No positions over night. Many small orders Typical behavior - Reverse price strategy Sells when price dips Buys when price moves up No delays! More money spent = more speed available Servers are located close the execution venues Sponsored access Arbitrage opportunities diminishing Entry of more HFT based operations

10 Ongoing Issues Same rules apply to HFT as to any other trading operation But clients using HFT are not required to be authorized Market abuse? Front running Pinging Tools are not illegal, but breaking the law is Price manipulation Things can still go wrong only much faster Flash crash Outliers A flickering blur

11 Impact On Agency Business 1/2 Different feelings about HFT Destroys the market Creates a healthy market What we do know 50% of turnover is through automated trading Inconclusive that automated trading is the cause to the current market problems. Improved price discovery, liquidity and volatility Regulatory today Authorization of proprietary trading End-customers are not regulated directly Controlled by their brokerage or bank

12 Impact on Agency Business 2/2 Best Execution Policy must be updated Is the customer affected? Do we supply HFT tools? How do we define automated trading? No tools = Focus on long term investments Day traders are growing their use of HFT Hedge funds use automated trading tools Will retail clients move their investments else where?

13 Impact On Back Office Number of executed trades increasing rapidly How many contract notes for one order with trades? How do we follow up best execution? Trade reporting New execution venues Each market and broker will require new routines and staff Automation CCP interoperability All studies focus on execution costs What about: Settlement Clearing Custody MiFID II More requirements

14 MiFID 2 Definitions 1/2 Automated Trading = Algorithmic Trading The use of computer programmes to enter trading orders where the computer algorithm decides on aspects of execution of the order such as the timing, quantity and price of the order. Used by fund managers and brokers Wide spread use

15 MiFID 2 Definitions 2/2 High Frequency Trading is a type of Automated Trading Typically not a strategy in itself but the use of very sophisticated technology to implement traditional trading strategies. Used by proprietary traders and day traders Exclusive service, expensive Automated Trading is not always High Frequency Trading

16 MiFID 2 - Organizational Requirements Persons Quantity > Minimum threshold Authorized as investment firms Full regulatory oversight Firms Robust risk control Mitigate potential trading system errors Disclose algorithms (!) Controls & Filters Errors and market abuse Execution Venue Robust risk control Circuit breakers Ensure resilience avoid system break down Provide equal and fair access

17 MiFID 2 Further Regulations Minimum tick sizes for market operators HFT can be forced to become a market maker Avoid the short term focus Significant amount of trades in a financial instrument Same conditions and requirements as for a market maker Order book suggestions Minimum time before order may be cancelled Maximum order to executed trade ratio per participant Algorithms to be approved by competent authority Problem with know-how Disclose business secrets

18 The Danger Lies In the Slow Adaptation The rules and regulations apply to all financial institutions However, when the evolution is moving quickly forward then they who monitor the activities tends to be too slow to follow. The business side involves compliance and the risk management on a need to know basis To monitor the markets today in real time requires completely new tools. New regulation will not be in place for a few years

19 Remember - Evolution Is On-Going Tools available! Faster!! (MiFID 2007/11) Flexibility! Data Limit reached! Execute Rules Limit reached! Flexibility!! Faster! Tools available!

20 In Conclusion The evolution towards a more automated market for securities trading will accelerate Tools for this type of trading will become cheaper and available New rules and new types of products will continuously emerge The impact on back office will depend on: New regulations Type of business The focus of regulation is to create a level playing field.

21 Further Reading ESMA, Finansinspektionen, Fondhandlarföreningen, FSA, FIX /FAST, Fidessa Fragmentation Index, fragmentation.fidessa.com

22 Questions Fredrik Hjorth Tradeflow AB Direct: Mobile: Member of the FIX Protocol Leauge