Swiss Exchange Lures High Frequency Traders
In the computerized world of markets, it’s not every second that counts – it’s every micro second.
That’s why Six Swiss Exchange announced it will offer co-location services – allowing for the shortest connection between its trading platform and the trading systems of its participants – in the first half of next year.
The so-called “co-location” system allows trades to be processed in under 100 micro seconds – a fraction of the time traditional trading systems take.
Under the co-location concept, the exchange server and the client’s trading systems are located in the same room and can thus transmit orders more quickly.
High-frequency traders typically make profits by exploiting price inefficiencies by entering a string of small orders at very high speed and exiting the trades within seconds.
Christian Katz, CEO of SIX Swiss Exchange told CNBC that its current proximity services offering HFT fast access to the SIX trading platform has seen triple digit growth in uptake by clients last year alone. "The co-location platform is just the next logical step to meet our clients’ needs,” he said.
The Swiss exchange’s move to cater to the high frequency trading firms follows the setup of similar trading platforms by rivals LSE, NYSE and Deutsche Boerse.
Johannes Thormann, Global Head of Exchanges at HSBC in Duesseldorf estimates that high frequency traders already account for around 50 percent of the NYSE’s trading volume. Other estimates put the share at even 70 percent.
On European exchanges, Thormann believes the percentage of trading volume accounted for by HTF firms is between 30-45 percent, but growth could be capped by an introduction of a transaction tax, as proposed by the European Commission which aims to curb excessive volatility.
“We currently see a two thirds probability of a euro zone Financial Transaction Tax (FTT)," Thormann said. "The decline in trading volumes resulting from the FTT would depend on several factors, but we believe it could be up to 50 percent for both cash instruments and derivatives. The decline would mainly be driven by the crowding out of high frequency traders because of higher costs per trade.”
High frequency trading firms have experienced a major backlash from regulators recently, as they are being blamed for erratic market moves, most prominently the May 2010 1000 point flash crash on the Dow Jones Industrial Average.
The flash crash has also dented retail investors’ appetite for trading equities as traditional stock picking is increasingly difficult and investors’ holdings are prone to large swings.
The CEO of Swiss Exchange defends the HFT trading firms, saying: “They engage in no criminal activity. HFT encompasses various activities and we at SIX Swiss Exchange have already been enforcing many of the proposals on effective circuit breakers over the past years”
While many HFT firms welcome efforts by exchanges to upgrade their systems, many traders—especially in Asia—are still appalled by high fee the exchanges charge.
”While we have not communicated the pricing for our co-location service yet, we will make sure it is priced attractively,” Katz said.
Thormann added fees were generally lower in Europe than they were in Asia. "But they are high enough for European exchanges to make a small profit”.
However, when the European Commission pushes through with the financial transaction tax, that high frequency trading revenue pie may get a lot smaller.
Correction: This version of the story makes clear Six Swiss Exchange announced on Wednesday that it will launch co-location services on its new high frequency trading platform starting next year. A previous version of the story said the Swiss Exchange had just announced it would launch a new high frequency trading platform – in fact that announcement was made in June.