He also dismisses fears that HFT strategies can run amok, like the dinosaurs in "Jurassic Park." "That’s not their nature," he says. "These are short-term traders; they’re looking to neither cause nor benefit from large moves; they’re in and out in a few seconds." He adds, these are simple, well-supervised strategies.
"Behind every algorithm stands a human being who is watching it, recalibrating it," he says. "Most of the people running these strategies have stringent risk controls, because they’re playing with their own money. They’re very conservative in terms of stop-losses and things like that, which often is lost when politicians speak out."
Still, the European Commission has made HFT a central focus in the current review of its Markets in Financial Instruments Directive (MiFID), and U.S. Securities and Exchange Commission Chairperson Mary Schapiro is calling for tougher regulation of HFT.
The basic question that regulators are asking is whether HFT enhances liquidity in ways that longer-term algorithmic strategies don’t — or whether it disrupts trade? If the answer is "both of the above," they’ll be asking whether enhanced liquidity outweighs the disruption.
Former London Stock Exchange boss Dame Clara Furse is heading up what may prove to be the most comprehensive review of HFT’s impacts on market structure. Under the U.K. government’s Foresight Project that is run by the Department of Business Innovation and Skills, she’ll be working with leading practitioners and academics to come up with science-based recommendations for regulators.
Algorithmic trading pre-dates the advent of electronic exchanges, but it’s become more advanced as electronic trade-matching became the norm. With the advent of direct market access (DMA), every major exchange has a large subset of members who inject their trades directly onto a platform, often from facilities just feet away from the exchange’s own trade-matching engine. As in the floor days of old, this means that some traders have a front seat, while others are in the rafters.
In January, Tabb Group estimated that HFT accounts for up to 77% of the volume on U.K. equity exchanges, but many participants question that figure.
Misra believes the actual figure is closer to 60% on equity exchanges, and lower on futures exchanges. Those figures are more in line with the ones Zubulake published last year in the Aite report, "High Frequency Trading in the Futures Markets." He concluded that professional HFT firms were on a pace to account for just 25% of futures volume in 2010 — a projection he believes proved fairly accurate at year-end, though is significantly lower than many other estimates (see "Not as big as you think").
He points out, however, that not all algorithmic trading is HFT, and that the total amount of volume generated via an application programming interface (API) probably topped 60% last year, which may explain the discrepancy.