Trading firms employing high speed trading techniques are being competitive and showing a technological edge. Sometimes this is for their own trading purposes. But, like a motorway, the same networks are available to a whole range of investors from the private client to the institutional fund manager.
The first cousin of high frequency trading , algorithmic trading, is widely and routinely used by the buy side to ensure they are reacting to information quickly rather than being behind the curve. And algos are specifically necessary since, in the interests of competition and lower fees, exchange trading monopolies were fragmented into different trading venues.
There is a direct relationship between the time it takes to execute an order (latency), and order volume. When you decrease latency, volume goes up. But an increase in order flow may not always lead to an increase in trades because of market dynamics.
Fast technology at the trading venue level is being used to level the playing field by providing transparency and efficiency to a public market. A faster exchange matching engine acts as an enabler and assuming the business model stands up, liquidity providers will be more attracted to the fastest platform as it reacts quicker to price movements when they update their quotes. As a result of this they also have less chance of being picked off by arbitrageurs than those on a slower platform when the same instrument is traded across platforms. This is one of the primary reasons why Chi-X Europe gained market share from the LSE and fared better than Turquoise and now with the LSE Group upgrading their systems the scenario could play out in reverse.
Faster quote updates by liquidity providers therefore help encourage tighter spreads and more depth of liquidity and in turn aid price discovery as the liquidity takers have the opportunity to trade more times on a faster system with potential price improvement than on a slower one on the back of quicker matching speeds and faster market data updates. This benefits market participants as a whole be they fundamental investors or short term quantitative players.
About the Author
Hirander Misra is the co-founder of both companies and is responsible for running Algo Technologies to deliver specialist high speed trading technology solutions which include extremely low latency distributed raw and normalised market data (AlgoData), matching technology with the world’s fastest independently verified matching engine (AlgoM2) and shortest path inter exchange network connectivity (AlgoSpan) with the added advantage of expert market structure consultancy services.