Swissquote Conference 2014 on Algorithmic and High-Frequency Trading
The fifth annual Swissquote Conference took place at EPFL on 7 November. Topic of this year was algorithmic and high-frequency trading (HFT) that have become the norm for electronic trading of financial assets worldwide. The raise of HFT has been enforced by the pairing of technological development and new market regulation that was implemented at the dawn of the financial crisis 2007. While the financial crisis obviously kept the attention of the public over the past years, awareness of HFT has raised only quite recently. Recent episodes such as the “flash crash” of May 2010, and the perception of HFT as extracting rents from conventional low-frequency and long-term investors, paints a picture of HFT as new technological evil.
The Swissquote Conference brought together leading finance scholars and practitioners who provided firsthand insights in the latest issues around HFT. Richard Olsen from OLSEN focused on the big picture of the future of digital markets. He promoted how the decentralized ledger technology of Bitcoin will revolutionize financial market structure. Thierry Foucault from HEC Paris presented a theoretical model that explains how HFT is fast adjusting to news and yet consistently following a long-term objective. Christian Katz, CEO of SIX Swiss Exchange, highlighted differences between US and European including Swiss markets in view of regulation and HFT impact. Smart regulation and market quality is a key aspect to achieve a positive contribution from HFTs. Charles Jones from Columbia Business School, currently also advising the US Financial Industry Regulatory Advisory, addressed potential problems when it comes to assess regulatory treatment effects. Robert Almgren from Quantitative Brokers presented a market simulator for electronic bond trading. Such quantitative tools are indispensable for the development of well-functioning HFT algorithms. Albert Kyle, University of Maryland, and Andrei Kirilenko, MIT, provided an empirical analysis of the flash crash of 6 May 2010. They showed that HFT did not cause the flash crash but exacerbated the price movements. Their study gives new insights on the trading behavior of HFTs and draws recommendations for making automated markets more resilient.
The conference featured seven presentations and a panel discussion. It attracted 160 participants, one third of which came from the financial industry.
The bottom line of the conference is that HFT is an artefact of the new fragmentation and digitalization of financial markets. As such HFT is a sign of technological progress that is entering most matters of modern society. Market infrastructure needs to continuously adapt to this progress in order to assert a high quality functioning and resilience of the markets. Market regulation needs to be prudently imposed. It should be paired with profound knowledge of financial economics and information technology. Otherwise it can create a venue for side effects that are not for the benefit of the society.