High Frequency Trading — sorting out the issues

Blog - 2012.11.19

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High Frequency Trading was the topic of the day when Randolf Roth from Eurex held a Cinnober Keynote talk on November 14.

Randolf Roth has extensive experience in the financial industry and especially the trading sector. He  is Head of Market Structure at the Deutsche Börse/Eurex in Frankfurt, a job which lately became mostly concerned with addressing the various regulatory initiatives.  

In an interesting and fact-packed lecture, Roth argued about the definition of HFT and proposed that the concept should be seen as a technology, not a strategy. The discussion also pointed out that HFT traders are not to be regarded as some sort of "bad guys" or "troublemakers", but rather as a natural part of an evolving marketplace that helps to make them more efficient.  Roth illustrated major protection points at Eurex and Xetra across the value chain, including procedures and practices that mitigate potential risks arising from high-speed trading.

Roth also addressed some of the anxieties surrounding the risk of algorithms going out of control and what the key challenges really are for exchanges and CCPs.  

Speed is important because anyone who is a liquidity provider needs to be speed-sensitive,” remarked Roth. “Speed is a risk management tool for participants, and shouldn’t be blamed for volatility. HFT strategies typically profit from volatility, but don’t cause it.

Veronica Augustsson, CEO of Cinnober and initiator of this Keynote on HFT, had already heard Roth’s highly appreciated presentation on this topic at SFOA's annual conference in Interlaken.

I totally agree with Randolf’s message, and not least the insight that every day something may go wrong in the market,” says Augustsson. “The key is how to handle such failures and mistakes so that the impact is minimised. That is why most of us use seat belts in the car and the same kind of thinking should apply to financial technology.” 

In addition, Roth also showed a very interesting demonstration of a strong short-term DAX future fall on Eurex on 25 August 2011 - indicating how HFT played an active role in the management of that crash rather than actually contributing to it.  

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