Technologies set for introduction over the next six months will sharply increase the speed at which users of alternative trading systems (ATS) can process orders, both for clients and their firms.
And, in light of some recent snafus with both high-speed and conventional trading systems, the temptation for regulators might be to clamp down to ensure the playing field remains level.
That would be a mistake, say participants at an OSC dialogue held earlier this week in Toronto.
Instead, they suggest regulators look at behaviours that cause problems for market participants, such as limiting price discovery, and not simply declare that high-speed trading is bad.
Press coverage of the errors made in the recent Facebook IPO as well as troubles at Knight Securities have led clients to believe the sky is falling, when in fact they’re relatively isolated incidents.
Worse, events like the LIBOR scandal, which aren’t directly linked to electronic markets, add noise and hype that harms public confidence.
In reality, circuit breakers and other risk management measures are protecting consumers. But the markets aren’t telling participants how good the fill rates are, and how infrequently failures happen.
“If you look at the Knight incident, it happened early in the morning and by 10:05 people were on TV talking about what’s going on,” says one panellist. “But unless you worked at Knight, you don’t know what went on. And if you actually waited until the facts were straight, you wouldn’t be on TV for a week.
“We have to do something to make sure the first voice isn’t a misinformed voice.”
And, since all Canadian marketplace trades are made electronically, it’s important to differentiate between those normal activities and high-speed practices that take place on ATS venues.
“The people who really are worried about the milliseconds or microseconds are competing with each other,” notes another panellist. “They’re not really hurting each other, although it may impact some broker-dealer profits.”
And change is coming, whether markets like it or not. Absent drastic regulatory intervention, panellists note there will be microwaves sending orders to New York within six months.
The pace of technology is simply so fast that it will be impossible to get it right for all parties’ interests every time. The planned microwave networks will allow someone to trade ahead of traders on more conventional networks; and that reality may reopen the discussion about speed and how it should be applied to best-execution requirements that brokers are held to.
Audience members, meanwhile, commented on how 10 years ago there was gnashing of teeth over traders who’d learned to beat the Small Order Execution System; and that 30 years ago there was outcry over the ability of floor traders who knew sign language to trade ahead of those using floor runners. As long as speed’s important, market participants will find ways to move faster.
But, as one commenter joked, “It doesn’t really matter if people are engaged in a nuclear arms race — as long as the end result isn’t world annihilation.”