financial times article on hft, page-6

High-frequency trading is ?chewing gum?
By Jeremy Grant in London

Published: October 20 2010 19:22 | Last updated: October 20 2010 19:22

High-frequency trading in markets is little more than ?chewing gum? and is pushing aside the ?natural liquidity? provided by traditional investors, the head of the Prague Stock Exchange has warned.

In an outspoken attack on the fast growing practice of high-frequency trading, Petr Koblic, the exchange?s chief executive, said there had been a ?dramatic drop? in liquidity, or trading activity, from long-standing market participants such as pension funds and smaller retail investors.

In their place have come high-frequency traders, who use sophisticated computers to trade in and out of stocks in fractions of a second. They can be independent groups, hedge funds or investment banks.

Regulators are examining high-frequency trading amid questions over whether such activity provides genuine liquidity to markets, especially given the practice of making and then cancelling orders as part of some high-frequency trading strategies.

High-frequency traders argue that they provide genuine liquidity. Their case has been backed up by some academic studies and many industry experts.

Mr Koblic said that volume on Europe?s exchanges had fallen in the last two years as liquidity from pension funds and retail investors had also declined. High-frequency traders had been courted by exchanges and rival trading platforms, known as ?multilateral trading facilities? (MTFs), which sprang up in the wake of the Markets in Financial Instruments Directive (Mifid) in 2007.

?High-frequency trading is not natural liquidity, of course not. It?s a stick of chewing gum,? he told the Financial Times at an exchanges conference.

He criticised the MTFs, which include Chi-X Europe, BATS Europe and Turquoise, for being ?opportunistic cherry-pickers? of the most liquid stocks in Europe?s national markets since their users, many of them high-frequency traders, tended only to deal in the most actively-traded blue chips.

?Is this what we want in the European capital markets? Will this robot [trader] give capital to a mid-cap company that wants to do a listing? Probably not.?

The Prague exchange, controlled by Wiener B?rse, has very little high-frequency trading, relying on local market-makers.

Mr Koblic said European regulators had been ?listening too much to the needs of the big guys, the biggest investment banks?, which trade large amounts of shares off-exchange in their own networks.

He also questioned the growth of the use of computer algorithms, or ?algos?, which are used by asset managers, hedge finds, banks and high-frequency traders to drive trades electronically. ?The question is where we should be with this. Is it okay for 90 per cent of trading to be done by algos in five years?

?I?m not someone who wants us to return to the 19th century as this is the reality we have now. But the regulators should focus on improving natural liquidity and listening to normal investors.?
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