He may not be able to work as a quickly as a high-frequency trader, but Ian Russell gets to the point right away.
“Let me state categorically that the Canadian equity markets are definitely not ‘rigged,’” begins the letter by the president of the Investment Industry Association of Canada that was published online this week. Russell is responding to the ongoing outrage provoked by Flash Boys, the book by Michael Lewis that suggests high-frequency traders (HFTs) are using servers and software to manipulate the market by executing trades milliseconds before interested investors can, then forcing them to pay more than what they would have paid otherwise. Lewis’ book has sparked a huge debate in the financial trading industry which has gone much farther than the U.S.
“However, one must bear in mind that HFT has the potential to create unfairness,” Russell admits later on. “While market participants have made efforts to mask trading signals and information leakages to evade HFT interference, and regulators ensure public information is accessible to all investors at the same time, many market participants still call for further remedial action. The good news is that industry awareness has improved. As a result, when obvious abusive practices are identified, such as the use of Flash Orders in the U.S., marketplaces and participants are forced to discontinue these practices.”
Wasn’t this what we wanted?
The Flash Boys effect has created an unusual situation in the history of technology and financial services. Historically, the aim of IT – one seldom achieved – has been to create systems that in some way predict the future, and allow firms to gain a competitive advantage. As far as HFTs are concerned, that mission has been accomplished. The Wall Street Journal acknowledged as much in its review of the book: “It is not hard to imagine a different book by Michael Lewis, one celebrating HFTs as revolutionary outsiders, a cadre of innovative engineers and computer scientists (many of them immigrants), rising from the rubble of 2008 and making fools of a plodding financial system.”
While HFTs have the tools to churn through big data and get ahead of the market, the potential for bad behaviour is having an adverse impact on the sector as a whole. Even Jos Schmidtt, CEO of proposed new stock exchange Aequitas Neo Exchange, discussed the reputational damage in a speech to Toronto’s Economic Club. “The noise will not go away and investor confidence will not come back by itself,” the Financial Post reported.
Whether it’s the increased regulation the Investment Industry Association of Canada no doubt wants to avoid or the commercial solutions that Aequitas is promising, the story of Flash Boys will undoubtedly bring a lot of changes to the financial trading industry. For those who provide the IT to support such organizations, it’s probably important to focus on what won’t change. This includes the need for high-performance, reliability and an ongoing interest in reducing time to decisions and transactions.
The mission of IT will not be focused on proving the system isn’t rigged, but demonstrating that all players in this sector are progressing to the point where rigging becomes impossible, where the get-rich-quick antics of HFTs wind up looking more like a flash in the pan.
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