High-Frequency Trading

High-frequency trading sees a planet divided

The debate over the use of high-frequency trading (HFT) has reached fever pitch following the publication of Michael Lewis' latest book "Flash Boys."

But while the controversy surrounding the trading method has only recently come to the attention of the general public, regulators and investors around the world have already embraced and, in some cases, clamped down on high-speed trading.

HFT is the use of high-speed data connections and super-fast computers to give traders an edge over competitors. Advance technology and cabling is used and, in some cases, computers are "co-located" next to stock exchanges to maximize the speed at which trades can be done.

Lewis may have said that high-speed trading has "rigged" the stock markets—but he accepts that it's only some aspects of this trading strategy that could be deemed to be bad. In particular he alleges that HFT traders are able to "front run" orders, which means they are able to buy in front of you and sell back to you when you want to buy—although this strategy is not deemed to be illegal. There are also wider concerns regarding volatility with HFT, with the trading practice taking the blame for many high-profile "flash crashes"—deep dips in a stock index—in recent years.

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Meanwhile proponents of HFT argue that it provides more liquidity and generally more efficient markets. Research has also shown that it has tightened spreads and also reduced transaction costs for investors.

Across the globe, governments and regulators have responded to HFT with a wide variety of measures.


Europe like the U.S., has embraced this new technology into its stock markets. HFT peaked in 2009 in the U.S., accounting for 62 percent of equity trades that year. In Europe, the peak was a year later, seeing 38 percent of all equity trades in 2010 and has since slipped lower.

Steve Previs, a longtime equity-sales trader at Mint Partners, a leading London agency brokerage, told CNBC that he believes HFT is not as prevalent in Europe as it is in the U.S., as the infrastructure and cash involved is a lot smaller, but it still leaves a bad taste in his mouth.

"After having executed hundreds of thousands of trades worth hundreds of billions of dollars, we can, with great confidence, acknowledge the fact those mudcat bottom-feeders have used technology to steal tens of billions of dollars from unsuspecting market participants," he said in a research note published last week.

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However, events in France and Italy have done little to increase these volumes. Last year, a group of 11 European Union countries announced their intention to impose a financial transaction tax as a way to make the banking sector take responsibility for its role in the economic crisis. Part of the tax includes a levy on HFT – a costly move for high-speed traders especially when a large amount of trades are placed in a small amount of time. Reuters data shows that the tax as a whole has coincided with a decrease in trading volumes, with French and Italian turnover down 10 percent by August last year.

The London Stock Exchange might seem unaffected by this move due to the U.K.'s strong stance against the financial transaction tax but the LSE's parent company does operate a bourse in Italy. In its 2013 annual report, it suggests a variety of reasons for a slump in volumes and revenues last year but mentions the transaction tax.

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A spokesperson for the European Securities and Markets Authority (ESMA) told CNBC that current "guidelines" on HFT are in the process of being replaced by a new directive that shall set mandatory registration and tougher record keeping requirements.

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Meanwhile in Switzerland, a spokesperson for Swiss Financial Market Supervisory Authority (FINMA) told CNBC that it's aware of the accusations faced by HFT but said that there are no particular measures foreseen that could curb that trading strategy in the Swiss market.

Read MoreMichael Lewis: Rigged markets an 'accidental conspiracy'

Pacific-Asia region

In the Asia-Pacific region, the regulatory roadmap is equally mixed. Australia's regulator the Australian Securities and Investments Commission (ASIC) told CNBC that it has taken "extensive analysis and consultation" regarding HFT and did not find the alleged issues described in recent media reports.

"Rather, we found the Australian market to be one of high quality and integrity," a spokesperson told CNBC.

In Hong Kong, a stamp duty has put paid to any sizeable usage of HFT in the country. Also, Hong Kong does not have multiple trading facilities that create arbitrage opportunities for high frequency traders. The former territory's stock exchange is also considering whether to introduce circuit breakers to protect against flash trading of stocks. This proposal is something Singapore's stock exchange has introduced as well as mandating the use of pre-trade risk controls.

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Japan has embraced the technology since its introduction to the Tokyo Stock Exchange in 2010. The merits of the next generation Arrowhead trading system is proudly promoted on the exchange's website. Its usage has helped ramp up liquidity, according to research last April by the country's central bank, although the arrival of Japan's expansionary monetary policy last year is likely to have boosted trading volumes on a much wider scale.

By CNBC's Matt Clinch