IEX was founded by former RBC electronic traders Brad Katsuyama and Ronan Ryan, notorious for their portrayal in 2014 Michael Lewis’ book ‘Flash Boys’. In 2020 the group applied for approval for the D-limit order, which it claimed would combat adverse selection, levelling the playing field between HFTs and slower market participants.  

A D-limit allows traders and investors to submit a discretionary limit order that can adjust its pricing if the stock price is about to change for the worse, using predictive technology called IEX Signal.  

“We deny the petition challenging the SEC’s decision,” stated three federal court judges.

“D-Limit… is an innovative, yet simple, solution designed to enhance on-exchange liquidity,” IEX group president Ronan Ryan said at the launch. “D-Limit has gained the support of a broad coalition of asset managers, pension funds, brokers and market makers, and represents a continuation of our efforts to partner with the broker-dealer community to provide new solutions for best execution designed to help all market participants achieve better performance in displayed trading.” 

The order gained market support from players including Virtu Financial and Goldman Sachs. However, others were strenuously opposed: including Citadel Securities, which wrote to the SEC on 14 August, 2020 expressing its concern that the IEX proposal would discriminate against liquidity takers. 

“This proposal represents a significant departure from the current market structure, unfairly favouring IEX liquidity providers without any corresponding obligation, compelling market participants to preference IEX over other exchanges, and adversely impacting tens of millions of orders submitted by retail investors annually,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities, in the letter.  

The regulator nevertheless decided in favour of IEX and the order type was approved on 26 August, 2020, noting that there was no evidence that the D-limit would require “material changes” to brokers’ routing strategies. Widely seen as a victory for IEX, the D-limit was launched in October 2020. Citadel Securities subsequently petitioned for review, arguing that the SEC lacked substantial evidence for one of its findings and that three of the SEC’s decisions were (as referred to in the court statement) “arbitrary and capricious”. 

“No one in this case has alleged that latency arbitrage is unlawful. The issue, instead, is whether the SEC may allow IEX to innovate.”

The case was heard in October 2021 and on 29 July, 2022 the US Court of Appeals ruled conclusively in IEX’s favour. “We deny the petition challenging the SEC’s decision,” stated three federal court judges. “The SEC’s determination that the D-Limit order does not violate the Exchange Act by unfairly discriminating or unduly burdening competition was reasonable and supported by substantial evidence.” 

IEX, which promotes itself as a champion of fair investing, has vocally opposed latency arbitrage since it received regulatory approval to become a licensed trading venue back in 2016 – another controversial SEC decision that split the market, with detractors including Citadel Securities, the New York Stock Exchange and Nasdaq expressing vehement opposition, while players such as T Rowe Price and Franklin Templeton voiced public support.  

Last week’s decision saw the court expressing neutrality on the subject. “At issue is not whether companies like Citadel may seek advantages in the market by using advanced technology and ingenious trading strategies,” said the judges. “No one in this case has alleged that latency arbitrage is unlawful. The issue, instead, is whether the SEC may allow IEX to innovate, with the D-Limit order, in a way that offers new opportunities to long-term investors.”  

IEX called the ruling “a huge win for all investors and traders.” 

In a statement reported by Bloomberg, Citadel Securities spokesperson David Millar said: “We look forward to continuing to engage with the SEC to ensure that the best interests of both retail and institutional investors are protected.” 

Read more about IEX Exchange in our interview with Brad Katsuyama and Ronan Ryan following its licensing in 2016.  

Learn more about the consequences of the ‘Flash Boys’ case and the ripple effect from Lewis’ book in our latest feature for the Q2 magazine.  

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Beginning with the launch of Spread Networks – a company that at a cost of $300 million laid an ultra-low latency fibre optic cable connecting Chicago and New Jersey, in a bid to sell speed to HFTs and Wall Street banks – Flash Boys tells the story of latency arbitrage and market manipulation. Through high-speed connections – either through co-locations or access to enhanced proprietary data feeds – HFTs and proprietary traders were accused of taking advantage of oblivious traditional institutional and retail investors, using information gathered on the public markets at a faster speed or through access to banks’ private dark pools. According to the book, in 2011 roughly 30% of all stock market trades were occurring off-market, with most of these taking place in dark pools.

It was on Reg NMS in the US that Katsuyama and Ryan based their claims that the market was systemically rigged. Reg National Market System (NMS) was brought in by the Securities and Exchanges Commission (SEC) in the US in 2007, inspired by front-running charges against participants from 2004. It requires the broker to find the best price for the investor in the National Best Bid and Offer (NBBO) meaning the broker must first buy however much of that stock is available at the best price. To gather the picture of the NBBO, exchanges created Securities Information Processors (SIPs) – consolidated data feeds including all bid/ask quotes from every trading venue, however, the IEX founders claimed the system offered a loophole to those firms that were willing to build enhanced SIPs nearer to the exchange’s systems to harvest the information faster.

The aftermath

As the first window into the secret underhand operations of the market, the publishing of the novel has had a significant and lasting impact on how some participants choose to trade and has encouraged regulators to pay greater attention to various practices including payment for order flow in a bid to protect ordinary investors.

“Culturally the novel being published was a milestone at a large US asset manager – especially as we had just reached an inflection point in the industry where electronic trading was being universally being adopted as an efficiency tool and there was an acceptance that this was ‘good technology’ and would allow the industry to scale even more rapidly,” says one buy-sider.

“The ‘Flash Crash’ a few years earlier [a rapid stock market crash that lasted for approximately 30 minutes in 2010] introduced better risk controls, better systems and better oversight of the electronic functions which had been adopted in a limited manner by the larger asset managers. Akin to the recent run on $LUNA [a crash in the price of the digital asset at the start of June that caused $500 billion in losses in the broader crypto market], the event shed light on possible industry weaknesses such as the formation of negative feedback loops due to the fragile interconnectivity of fragmented markets and venues that had appeared as a consequence of the introduction of Reg NMS in the mid 2000s,” they continue.

“I was surprised at how little people knew about what was happening with their orders and how they interacted with proprietary trading activity operated by major banks and the book did at least force people to ask more questions and understand more about what was happening in a complex marketplace.”

Several court cases were immediately spawned based on allegations broadcast within the book: including investigations from the SEC into the dark pools of both Barclays and Credit Suisse. Ultimately, however, the blame fell at the doorstep of the exchanges for allowing the alleged behaviour to take place. In 2014, just a month after the book hit the shelves, five lawsuits were launched that eventually boiled down into a single action against the accused trading venues. 

The case – now dubbed the Flash Boys Case – put forward by institutional investors claimed that the exchanges (including Nasdaq, the New York Stock Exchange and BATS global Markets – now part of Cboe) had created a preferential trading environment for high frequency traders (HFTs) that put other investors at a disadvantage. Included in these favourable trading conditions were co-location services that allowed firms to place their servers in close proximity to the exchange’s servers, superior data feeds allowing participants to create a better and faster picture of the market, and the National Best Bid and Offer (NBBO) and complex order types, all offered for a fee.

These latency-focused solutions were designed to improve the speed at which firms could access valuable information and move in and out of orders on venues – which enabled them to get ahead of other investors and profit from the tiny gap in time when they were privy to information that the rest of the market was not. 

The case was thrown out in 2015 on the grounds that the exchanges’ self-regulatory status protected them from private damages lawsuits. However, it reared its ugly head again in 2017 when it was found they in fact had no such immunity. The seven exchanges moved to have it thrown out again in 2019, but this was denied. It was only in March 2022, eight years later, that the Federal Court concluded that the institutional investors could not prove they had suffered harm at the hands of the exchange’s actions, adding that the expert witness testimonial of Dave Lauer was not a reliable methodology. 

“The problem was that the institutional investors really didn’t have any proof that harm was occurring. While there have been some fines here and there I wouldn’t say there is any systemic proof that the markets are ‘rigged’. Electronification was supposed to put the buy-side on an even keel with the sell-side and enable people to trade from anywhere. Theoretically, you didn’t need to be standing on the floor of the New York Stock Exchange to have as much of an advantage as anybody. The problem with that theory is the laws of physics and the issue of speed,” says head of market structure research for Bloomberg Intelligence, Larry Tabb.

“The job of an exchange is price discovery and so they’re less worried about volume and more worried about the tightest possible price that they can provide. They’re also interested in transaction flow because exchanges get paid by the SEC in terms of market data in two ways, one being the number of shares they execute and the other being the aggressiveness of the bids and offers on their market. They’re going to get a larger rebate if the price is tighter versus whether the price is lower or wider and so while I don’t think there’s a collusion to make the markets worse for institutional investors, there are incentives in the exchange infrastructure to try to provide a fast, tight, efficient market.”

Co-location and proprietary products are offered to all institutions and are approved by the SEC, explains one HFT. “The buy-side connects to exchanges via brokers and one of the first questions they usually ask them is do your algos connect to proprietary data feeds,” they say. “Everyone has access to the same thing.”

According to some voices in the market, the court case relating to the publishing of Flash Boys was not driven by feelings of aggrievement from institutional investors but instead at least in part by a set of proactive law firms looking to encourage participants to take part in presumably lucrative lawsuits.

Earlier this month, retail broker Charles Schwab was asked to pay $187 million to settle charges with the SEC that it had misled its robo-advisor clients with regards to fees. The SEC found that from 2015-2018 Schwab did not reveal to clients that the service was directing funds “in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions”.

“If you looked at Bloomberg, there were law firms popping up asking for elite plaintiffs to represent in similar cases to what had happened with Schwab. It’s the same thing for the Flash Boys case, law firms looking for plaintiffs. It’s a uniquely American and uniquely annoying problem,” says the HFT.

Widening the field

While legal action has been somewhat unsuccessful, the publishing of the novel has been effective in driving evolution in the industry. Bringing the events of Flash Boys to the wider market’s attention increased demand for transparency from investors and expanded the range of trading venues available in the market. As Lewis so eloquently put it, the problem was not about removing the hyenas and the vultures from the food chain, it was about giving them fewer chances to kill. 

Among the new venues to come to market is US-based Investors Exchange (IEX), co-founded by Flash Boys stars Katsuyama and Ryan in 2013. In light of what they thought they had discovered, the pair wanted to foster a marketplace that would allow high frequency and traditional institutions to co-exist more harmoniously. Alongside various speed bump mechanisms, the exchange has introduced what is referred to as a D-Limit order or “discretionary limit order”. Limit orders allow an investor to buy or sell a security at a specified price or better. IEX’s order predicts when the market is about to move and then moves limit orders at the bottom of the orderbook – usually belonging to the buy-side – out of the way so they are not run over. 

“Things like the D-limit order are not only looking at how to slow trading down, but also to see if venues can protect limit orders that are already existing on the exchange,” says one industry insider. “To their credit the general concept for most exchanges is to maximise liquidity because if you don’t trade, you don’t get paid, you don’t get to get tape revenue and you don’t get all of the market data benefits. In this instance, they’re actually putting an order type in that says when the flag goes up we’re going to move your order away from trading.”

However, the D-limit order is not without its own controversies. It has come under criticism from some who claim it only offers IEX members a delay and therefore puts non-IEX members at a disadvantage to the rest of the market. 

“If IEX was on a fair footing with everybody else who could take a look at the order book and move then it wouldn’t be that controversial,” adds Tabb. “The controversy lies in that moving those D-limit orders does not go over the speed bump for IEX clients, so they have a 350-microsecond advantage over everybody else.”

IEX’s market share hit 3% for the first time in August 2019, although has been somewhat overshadowed by independent Members Exchange (MEMX) which launched into the market in October 2020 with the goal of increasing competition, improving transparency and reducing costs. MEMX entered the market with 0.1% market share only to reach 3% in April earlier this year. IEX declined to comment. 

“That gets back to this issue about speed and market making. MEMX is fast and cheap. They also have a high rebate,” says Tabb. “The ability to be fast and have a high rebate means that MEMX is paying people to trade there and so because they pay you to trade there you can quote more aggressively as well because they’re fast you can quote more aggressively.”

Also launched in 2013 was the Aquis Exchange which, following the same philosophy of IEX, does not allow HFTs to cross the spread in order to prevent them using certain trading strategies on the exchange. Instead, the exchange only allows them to use a specific post-only order type.

“We’re not anti-HFT but there are certain strategies that we believe are done by proprietary trading firms that change the profile of the liquidity pool. If you don’t have HFT and prop traders on your market it’s going to take longer to get your order filled and a lot of people want immediacy,” says Aquis chief executive, Alasdair Haynes. “If someone is always the winner you don’t get competition. We believe there should be several markets out there. Ones that have everybody and others that are specific for the longer-term investor. They can co-habit.”

The events that followed the novel are also most likely the stimulus for European regulators to take more prescriptive action against broker crossing networks (BCNs) scrapped as part of Mifid II in 2018 and to encourage more volumes towards agency matching venues and periodic auctions. 

Payment for order flow

Another practice on which the publishing of Flash Boys shone a spotlight was the controversial process of paying for order flow (PFOF), whereby retail brokers channel their customers’ flow to banks and market makers in return for a fee. Not only do firms have the opportunity to channel this flow to where it might suit them – the US exchange rebate system means some venues charge pay you for providing or taking liquidity – but it also gives these firms access to the information within each order that could then be traded against in the wider market. 

The retail market in the US has swollen in recent years on the back of the pandemic, and the events surrounding the GameStop saga and the meme stock explosion, and the increased attention has brought PFOF into the crosshairs of the regulators. In a recent speech, SEC chair Gary Gensler warned that PFOF presented conflicts of interest and distorted routing decisions. He also suggested it may incentivise brokers to encourage the gamification of the markets as seen with GameStop in a bid to increase trading volumes.

“Exchanges give rebates to traders. High-volume traders benefit more from these arrangements, and retail investors don’t directly benefit from those rebates,” said Gensler. “Just as payment for order flow presents a conflict of interest in the routing of marketable retail orders, exchange rebates may present a similar conflict in the routing of customer limit orders.”

According to 606 reports gathered by the SEC, Citadel Securities forked out the most in payment for order flow in 2020 and 2021 at $2.6 billion, followed by Susquehanna (G1X global execution brokers) which spent a $1.5 billion and Virtu which spent $654 million in the same period.

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The US Securities and Exchange Commission (SEC) has denied a proposal from Cboe Global Markets to introduce a four-millisecond delay on its equities exchange.

The controversial speed bump was opposed by some of the markets most active participants, including Citadel Securities, BlackRock, T.Rowe Price and industry lobby groups representing mutual funds, hedge funds and high frequency traders.

The SEC stated: “The commission concludes that the proposal is discriminatory and the exchange has not demonstrated that the proposal would not be unfair. The exchange has not demonstrated that the proposal is sufficiently tailored to its stated purpose, which is to improve displayed liquidity.”

Under the Cboe proposal, liquidity-taking orders sent to its EDGA exchange will have to wait four-milliseconds before trading with resting orders in the order book. It said this will provide market makers with sufficient time to re-price their rusting orders before ‘opportunistic’ or high frequency traders can trade with them at old prices.

“Cboe will remain committed to enhancing the US equity markets for all participants, and will continue to work closely with our regulators and industry to develop innovative products that benefit the marketplace,” Cboe said in a statement.

The proposal was set to be the third implemented by a major US exchange after IEX and NYSE American deployed their own speed bumps. However, Cboe said at the time of the plan that these mechanisms do not provide protection to market makers and participants that post two-sided markets, whereas its Liquidity Provider Protection feature would promote price forming displayed liquidity.

NYSE American also scrapped its speed bump in November last year, and instead implement a floor-based designated market maker scheme. 

However, opponents to the Cboe plan argued the speed bump would create unfair advantages for the fastest players, while at the same time, leaving mutual funds to be hit by orders.

The Investment Company Institute, a trade group that represents mutual funds managing more than $25 trillion in assets, wrote in a letter to the SEC that the speed bump would establish a “harmful precedent” by penalising slower market participants.

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The Financial Conduct Authority (FCA) said that as part of an in-depth study it analysed message data, including attempts or failed to trade messages, from the London Stock Exchange for all stocks in the FTSE 350 index over a nine-week period in 2015 to quantify latency arbitrage. 

Referred to by the market as ‘sniping’, latency arbitrage is defined as the practice whereby HFTs make very small profits by taking advantage of a brief gap, a matter of microseconds, before stock prices realign following a correlated instrument price shift. 

According to the FCA’s research, ‘sniping races’ are very frequent with the average FTSE 100 stock subjected to around 537 latency arbitrage races each day, or one every minute, and the races account for a significant 22% of average daily trading volume. 

The winners typically beat others by 5-10 microseconds, and the activity is concentrated with just a handful of firms winning the majority of the sniping races. Just six firms account for more than 80% of winners and losers of the races in its study. The firms were not named in the study.

The study concluded that the small profits gained by HFTs, the ‘latency arbitrage tax’, calculated as the ratio of daily race profits to daily trading volumes, is 0.42 basis points, equating to £60 million per year in the UK equity market, and $4.8 billion annually across global equity markets.

“As is often the case in regulatory settings, the detriment per transaction is quite small and a 0.42 basis points tax on trading volume certainly does not sound alarming. But it all adds up,” authors of the report from the FCA wrote in an overview. “And remember, we are talking here only about equities. The same phenomenon extends to other asset classes that trade on electronic limit order books such as futures, currencies, US treasuries and more.”

Furthermore, the activity negatively impacts institutional investors more than retail investors who have savings or pensions. The FCA said that sniping races and the ‘flawed market design’ has increased the costs of trading, but eliminating latency arbitrage would reduce the cost of liquidity by 17%.

HFT has been an issue of controversy following the publication of Michael Lewis’ best-seller ‘Flash Boys’, which suggested that the US stock market is rigged to benefit high-speed traders. Proposals have been made to deal with the HFT arms race, including implementing speed bumps on exchanges to slow down firms. Others have suggested continuous trading be eliminated in favour of frequent batch auctions to remove the incentive to trade faster and level the playing field.

The FCA has urged researchers and regulators to replicate its analysis of exchange message data on other markets to gain more insight, but most authorities do not capture the data and exchanges preserve it inconsistently. 

“The limit order book is viewed as the official record of what happened, but we argue that the message data, and especially the ‘error messages’ that indicate that a particular participant has failed in their request, are key to understanding speed-sensitive trading,” the study concluded.

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Virtu Financial’s Singapore entity was among the first round of HFT and market maker firms to gain regulatory approval from Japan’s Financial Services Agency (FSA), after new rules were introduced in April to improve controls for HFTs.

The FSA’s HFT regulation now requires firms such as Virtu Financial to register as a ‘high-speed trading’ (HST) business and demonstrate risk management processes.

Virtu said it strongly supported the FSA’s HST proposal and commended its efforts to improve market transparency, risk controls and system safeguards through its comment letter.  

“We applaud the expediency with which the FSA was able to propose, approve, and implement this important enhancement to the market’s safeguards,” commented Brett Fairclough, managing partner for Asia-Pacific at Virtu Financial.

“Virtu’s early HST registration demonstrates our commitment to transparency across the more than 235 markets in which we trade around the world.”

The company added that it has consistently supported registration for participants that access financial markets and enhancements to multi-layer pre-trade and post-trade risk control requirements.

HFT firm Flow Traders confirmed it had also gained regulatory approval to operate a high-speed trading business in Japan earlier this month. The registration means the company can participate in a newly-established exchange-traded fund (ETF) market maker programme.

Flow Traders added that it believes it can contribute significantly to the future growth of the ETF market in Japan via the scheme, which went live on 2 July this year.

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The Financial Services Agency of Japan (FSA) registered the firm which will allow it to participate in a newly established exchange-traded fund (ETF) market maker programme, Flow Traders said via LinkedIn announcement.

Japan Exchange Group’s (JPX) ETF market maker scheme launched on 2 July, aiming to improve liquidity of ETFs by providing incentives to designated market makers who fulfill obligations for issues based on applications.

With continuous quote by market maker, a sufficient amount of orders are shown at a fair price so investors can buy and sell ETFs at a desired timing, JPX said. The scheme also includes asset managers as sponsors for further incentives.  

Market makers involved in the scheme include Nomura Securities and Mitsubishi UFJ Morgan Stanley Securities.

“The programs goal is to increase liquidity in a defined set of ETFs to improve the attractiveness of these products to investors and is the first such program for ETFs in Japan,” Flow Traders said. “Flow Traders beliefs it can contribute via this program to future growth of the ETF market in Japan.”

In May, Flow Traders went live in Hong Kong as a designated securities market maker on the Hong Kong Stock Exchange as a liquidity provider on the Hong Kong Futures Exchange. The move allows the firm to provider liquidity in Hong Kong listed ETFs and futures as a regulated entity.

Chief trading officer, Folkert Joling, commented at the time that the approval was an important milestone for Flow Traders in Asian ETF markets.

“The smooth and fast implementation is a great accomplishment and we would like to thank the entire Flow Traders team in Asia for their commitment and efforts to get this realised in such a short time frame,” Folkert added.

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Autorité des Marchés Financiers (AMF) carried out the analysis of the initial impact of the regime on just over 500 shares on Euronext Paris, including CAA40 stocks.

It found the effects of the tick size rules were positive overall with less messages to create noise in the market, increased traded volumes and an increase in quantity available at best limits.

“It reveals a sharp increase in depth and a significant reduction in the number of messages sent to the market, at the cost, however, of a widening of the spread for the most liquid securities,” the analysis said.

“The outcome for market participants is a slight additional cost that is offset by the benefits of noise reduction and the increase in the quantity available at the best limits. For small caps, implementing appropriate tick sizes…resulted in a more dynamic order book and, above all, a sharp increase in traded volumes.”

European authorities introduced a harmonised tick size regime under MiFID II, although it proved to be controversial with certain market participants claiming it was put in place to control high-frequency trading (HFT) flow and activity.

The AMF’s study suggests the positive effects of the regime only concerns orders of non-HFT participants, with a decrease in market share seen across HFT firms.

HFT market makers’ share of the depth and traded volumes decreased for securities with an increased tick size, compared to securities where the tick size where market share remained the same.

The AMF said this suggests that increasing tick size allows more players to place orders at competitive prices in the order book, while HFT market makers fail to offset the competition of the other players at the best limits by gaining a better position in the queue.

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One of the world’s largest proprietary trading firms confirmed this week it will acquire RGM Advisors in the latest tie-up between high-frequency trading (HFT) firms.

DRW Holdings has agreed in principle to buy the Texas-based principal trading firm in a deal expected to be completed by the end of September this year.

Don Wilson, founder and CEO of DRW, described RGM as a well-respected market participant with a talented team and trading strategies.

“Bringing our companies together creates significant opportunity in equities trading, research and technology infrastructure, which will bolster liquidity and innovation in those markets,” he said.

Richard Gorelick, CEO at RGM Advisors, added the combination of both firms is a ‘natural fit’ that will benefit both companies and the markets more broadly.

Declines in profits alongside low volatility have forced HFT firms to reconsider business models in recent years, leading to several high-profile mergers and acquisitions.

HFT companies have struggled to remain profitable on speed alone so many have adopted new technologies and investment approaches to differentiate them from competitors.

The most recent, high profile acquisition was finalised in July this year when Virtu Financial acquired KCG in a deal estimated to be worth $1.4 billion. 

Both firms saw revenues drop across trading and market making business units prior to the deal due to low volatility and decreased trading volumes.

Similarly, in March Quantlab Financial revealed plans to buy a high-speed trading business from Teza Technologies in a deal worth around $30 million.

While Two Sigma Securities, the market making arm of quantitative hedge fund Two Sigma, said it will purchase the options trading business of Interactive Brokers in May this year. 

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They were pictured as predators, using high powered computers to execute trades at a millionth of a second, putting other market participants at their mercy.

Fast forward a few years later and the big bad HFT monsters don’t look quite so flash or scary. With the volatility index (VIX), also known as the ‘fear gauge’, at an all-time low, HFT firms are now facing a challenge they never thought they would have to face: making money.

It has forced some of the big players to make some radical decisions, with consolidation taking hold. The shock announcement that Virtu Financial will take over KCG in a massive $1.4 billion deal (which stole the show at this year’s FIA Boca conference in March) was the first major acquisition to arise out of 2017.

The decision from KCG to merge with its long-time rival could have been motivated out of declining profits. KCG had struggled outside of its US equities business in 2016, as revenues for non-US market making in the fourth quarter plummeted 60% to just $17 million in comparison to $43 million in the first quarter. 

This was followed up with news Houston-based Quantlab Financial would buy a high-speed trading business from Teza Technologies for between $20-30 million.

Finally Two Sigma Securities, the market making arm of Chicago based quantitative hedge fund Two Sigma, will purchase the options trading business of Interactive Brokers.

Tumber Hill, Interactive Brokers options market making unit, said it would shut down after 25 years of operation, following a reported $22 million loss in market making in the first quarter of 2017.  The wind down of the unit is expected to cost the company an estimated one-time cost of $25 million.

Fast but not so furious

So why has consolidation become the order of the day? Alongside a decline in profits, one motivation to merge is to expand into new asset classes.

“The acquisition of KCG shows the continuing competitive spot that marketplace is in. It has become more competitive for the HFT industry in general, and I wouldn’t be surprised to see more consolidation in that space. You will see some of the true proprietary traders merge as an expense cutting play and as a way to move into new asset classes,” says Carl Gilmore, president, Integritas Financial Consulting. 

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A database of high frequency trading (HFT) globally is to be developed over the next three years by economists and researchers.

The project - known as ‘Digging into High Frequency Data’ - will be led by co-director of the systematic risk centre at the London School of Economics and Political Science, Dr Jean-Pierre Zigrand.

He will work alongside experts from other universities across the UK, France, Germany, Finland and the US.

Those involved will attempt to capture data at the nanosecond on prices, volumes and dates of transactions, as well as other variables regulatory authorities could use like information on the state of the limit order book.

The database will be transatlantic and will allow researchers to analyse data generated by automated trading.

“These automated order book submissions and transactions now represent the majority of trading and although we have no formal proof of this yet, they are suspected of occasionally resulting in excessive price fluctuations,” Dr Zigrand said.

He added the digitalisation of society and the increased use of HFT and algorithms as completely changed the financial landscape.

“The increase in trading speed now allows markets to operate far beyond human capabilities, having a dramatic impact on the stability, liquidity and resilience of financial markets.”

The project will begin on 1 August this year.

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