High frequency trading

from Wikipedia, the free encyclopedia

As high frequency trading ( HFH , English high-frequency trading , abbreviated HFT ) is a powered computers with trading on the stock exchange referred to, which is characterized by short holding periods and high turnover.

High-performance computers act independently or with the influence of people within seconds down to the microsecond range according to the previously programmed algorithms . These react to changes in the market and then make trading decisions. An order is then sent to the respective exchange. No positions are usually held overnight. HFT can be understood as a special form of automated trading .

definition

The Securities Trading Act defines high-frequency trading as the buying and selling of instruments of the financial sector of a domestic and organized market or multilateral trading system using a high-frequency algorithmic trading technique, which is characterized by , in Section 2 (8) no.2 letter d

  • the use of infrastructures that aim to minimize latency ;
  • the decision of the system to initiate, generate, forward or execute an order without human intervention for individual transactions or orders;
  • a high volume of messages within the day in the form of orders, quotes or cancellations, also for proprietary trading .

Furthermore, high-frequency trading in the WpHG is characterized by the fact that the individual parameters of the respective order are determined independently by the computer algorithm. The characteristics of the parameters are, for example, the time, price or quantity of the order.

history

Public interest was piqued in 2009 by a blog post referring to Goldman Sachs' substantial profits from this form of trade. Numerous press articles followed. The US Securities and Exchange Commission SEC was on the part of US Senator Charles Schumer asked in 2009 to ban these commercial form. The SEC announced increased surveillance of high-frequency trading after US equity trading group Knight Capital lost $ 440 million in 45 minutes to a software bug on August 1, 2012. This form of trade is also being discussed in Europe. The Bundestag has passed a draft law regulating high-frequency trading. This is intended to limit and slow down exchange trading.

In his crime novel Allmen und der rosa Diamant , published in 2011, the Swiss bestselling author Martin Suter addresses the possibilities and negative consequences of high-frequency trading. In 2014, the publicist and business writer Michael Lewis caused his critical book Flash Boys. A Wall Street Revolt a debate about high frequency trading.

“The US stock market was now a class system of haves and have-nots, only what was had was not money but speed (which led to money). The haves paid for nanoseconds; the have-nots had no idea that a nanosecond had value. The haves enjoyed a perfect view of the market; the have-nots never saw the market at all. "

“The US stock market was now a class system of haves and have-nots, only the haves didn't have money, they had speed (which led to money). They bought nanoseconds; the have-nots didn't even know that nanoseconds had any value. The haves enjoyed the perfect market overview, while the have-nots never saw the real market. "

- Michael Lewis : The Wolf Hunters of Wall Street . In: New York Times, March 31, 2014

In response to Lewis' publications, Attorney General Eric Holder announced in early April 2014 that the SEC and the FBI had been investigating trade practices for some time.

principle

The principle of high-speed trading is based on the fact that typical securities orders cannot be processed on a single exchange , but the desired number of items can only be bought or sold together on several exchanges. The broker sends its orders to the various exchanges at the same time, which, according to its market information, are able to process the order together through the individual partial orders. The partial orders arrive at the exchanges at different times depending on the latency . A high-speed trader who firstly has access to real-time market data from the nearest stock exchange can speculate that the partial order he has seen includes further partial orders with buy or sell orders for the same stock or bond. Second, if he has optimized data lines to more distant exchanges, he can send orders to them, which precede the partial orders of the first broker there. This changes the price on this exchange, so that the high-speed trader can service the orders of the original customer that arrive later, but previously sent, from the papers that he was able to purchase in advance. However, at a new rate that is less favorable for the original customer. The original trader cannot see this market change until it occurs. The high-frequency trader moves his position back to zero. Because of the difference between the courses, he pulls a tiny profit per business.

The revenues from this trick are very low per transaction, but add up to quite large revenues. This trade has been going on for years and according to the market researchers of the Tabb Group it should have reached a value of 21 billion US dollars in 2008. In 2010, this form of trading is said to have already accounted for more than 50% of the sales volume of the US equity business.

Further analyzes by the financial data company Nanex show that the high-speed traders systematically simulate market liquidity by displaying the offer of a share or bond at a certain price artificially high. If an order at this price arrives at the first exchange, the offers are withdrawn from all other exchanges so quickly that only a (small) part of the order can be executed at the targeted price. Since the high-speed traders completely dominate the stock market, they can manipulate the prices of even the largest companies like the Ford Motor Company .

Strategies

arbitrage
Exploitation of exchange rate differences at different trading venues at the same time. This is only possible in markets without course taxes, as brokers or their software usually recognize this and adjust the prices accordingly even after the order has been received.

Cross-border trading

Exploiting exchange rate differences at trading venues in different countries, see Cross-Border Stock Trading . This form of arbitrage has a positive benefit for the general public as the fees in the form of bid / ask spreads for investors are reduced.
Statistical arbitrage
Exploitation of exchange rate differences between different instruments, which usually behave in the same way, but not in exceptional cases. Example: As a rule, stocks from one industry are related to each other. If BMW increases, so does VW. Should this not be the case, the value that rises is sold short and the value that falls is bought. The position is liquidated when the normal relationship is restored or a stop loss occurs .
Market making
The permanent setting of bid and ask prices .
Mean reversion
Exploiting the mean reversion effect .
Spread trading
Exploiting the price inefficiencies of futures contracts with different terms.
Quote stuffing
Trying to cram the exchange systems with orders to take advantage of delays in pricing. Not possible due to the regulations of the exchange operators in Germany.

Flash order / flash trading

A special form of automated trading is high-frequency trading using "lightning orders". With these, the computers are informed of a buy / sell order for milliseconds before the other market participants and thus have the option of accepting it and immediately selling it on with minimal surcharges. Even the smallest margins add up to considerable income due to large volumes.

Flash orders were first approved by the SEC in 2004 after the Boston Option Exchange applied for admission to trading. From a legal point of view, it is not entirely clear whether lightning trading is permitted in the European Union. From a German perspective, the Federal Financial Supervisory Authority would have the option of prohibiting lightning trading. A ban is currently being considered in the United States. The problem is the unequal treatment of market participants, which makes it possible for individual market participants (here the algo traders) to realize profits at the expense of the other market participants. In response to criticism from the American regulatory authorities, the Nasdaq OMX and Bats Global Markets exchanges have already announced that they will stop offering flash orders from September 2009.

The fact that a selected group of participants receives information and opportunities before other market participants is a thorn in the side of the critics of flash orders. On the other hand, proponents refer to the increasing liquidity and the decrease in the trading margin . With the latter, it is ultimately safer and cheaper for all market participants to trade, which justifies the “small” profits of the liquidity providers. A technique comparable to American flash orders is also available in Xetra trading under the name Xetra-BEST.

Legal situation in Germany

Germany is considered a pioneer in terms of legislation for high-frequency trading. In May 2013 the law for the avoidance of dangers and abuses in high frequency trading (high frequency trading law) came into force. It has set itself the goal of containing the effects of high-frequency trading on the financial market and sees the highest priority as avoiding the danger and abuse in the HFT. In terms of content, it will be very similar to EU legislation, the planned MiFid II for 2015.

Permission requirement

The obligations for algorithmic traders include, for example, the authorization requirement under Section 32 (1) KWG in conjunction with Section 1 (1) a no. 4 d KWG. According to this, traders who trade using a high-frequency algorithmic trading technique must be able to show a permit from the Federal Financial Supervisory Authority (BaFin). The changes to the license requirement provide for high-frequency traders who trade as independent institutes to be regulated. All forms of high-frequency trading are recorded. Regardless of their location, the area includes all high-frequency traders, regardless of whether they are trading on their own account or on behalf of others. Furthermore, it is ignored whether this is a direct or indirect participation in the business. As a result, foreign investors or traders have to open a branch in Germany, the so-called "European passport". This is not necessary for countries within the EU / EEC.

Obligation to organize

The organizational requirement regulates companies that work with the help of algorithmic computer programs. It provides that these computers or systems are subject to certain controls. Companies must have sufficient capacities, be subject to upper and lower trading limits and have reliable systems. Furthermore, the software of the high-frequency traders must be checked for malfunctions that could negatively affect the financial market. Controls must also be carried out to ensure that trading activities do not violate the regulations of the respective trading venue. In addition, high-frequency traders must document and properly monitor all algorithms.

Transition periods

The transition periods are to be mentioned in connection with permit applications. Deadlines occur as soon as a permit application has been announced. High-frequency traders who do not have a branch in Germany are given nine months. The normal transition period is six months. These regulations also apply to investment services companies, capital investment companies and self-governing investment stock corporations. After these six months, the entrepreneur's organizational obligations arise in the High Frequency Trading Act. So far, no legal penalties in the sense of a sanction have been provided for the transition periods.

Investors Exchange

A team of stock market analysts and technicians, some of whom previously worked at the Royal Bank of Canada and had researched the methods of high-frequency traders, founded their own exchange called the Investors Exchange (IEX) in 2013 . By deliberately delaying all signal runtimes by exactly 350 milliseconds, this ensures that no high-frequency trader can take advantage of their market data on other exchanges. The IEX positions itself as completely independent of banks and brokerage houses and their direct or indirect participation in high-frequency trading. Due to the deliberate delay of 350 ms, the high-frequency traders can no longer carry out risk-free arbitrage transactions because these may a. are based on taking advantage of short-term differences between prices on different exchanges.

The IEX started operations on October 28, 2013 and was able to briefly exceed the trading volume of the NYSE Amex (from 2017 NYSE American ) for the first time in mid-December .

criticism

High-frequency trading is often criticized by the public. The focus is on illegal practices (e.g. front running ). However, there are also high frequency trading strategies that help investors pay fewer fees on the exchanges as the market becomes more liquid, such as: B. in cross-border stock trading . However, some economists question the positive impact on trade. The lawyer Peter Kasiske also sees a disruptive action that simulates a non-existent demand. The American Securities and Exchange Commission ( SEC ), after analyzing all scientific studies available worldwide, came to the conclusion that in half of the cases, high-frequency traders increase the costs of other market participants with aggressive strategies.

Other critics commented on the speeds of the dealers. In order to gain little time advantage, the process called "co-location" attempts to increase the trading participant's physical proximity to the exchange. This results in advantages in the millisecond range, which are used as advantages over other market participants. Former stockbroker Dirk Müller criticized the short holding period for shares at high-frequency traders . He denies any economic sense if a share is held for just a few seconds.

The Dutch financial market regulator AFM examined these high-frequency trading models and came to the conclusion that there are no reasons to restrict high-frequency trading. However, this assessment changes when illegal trading strategies are used.

In addition to the criticism of high-frequency trading per se, the regulation of high-frequency trading and algorithmic trading, the subset of which is high-frequency trading, is also sharply criticized in legal literature and in practice on the stock exchange.

literature

  • Michael Lewis : Flash Boys: Revolt on Wall Street . Campus-Verlag, Frankfurt am Main; New York 2014, ISBN 978-3-593-50123-9 (American English: Flash Boys (A Wall Street Revolt) . 2014. Translated by Jürgen Neubauer).
  • John Lanchester: The super click. How high frequency trading works. In: Le Monde diplomatique . Berlin, July 2014, pp. 1, 10 f. ( online ).
  • Peter Kovac: Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading . Directissima Press, 2014, ISBN 978-0-692-33690-8 (English).
  • Uwe Gresser: Practical Guide to High Frequency Trading . tape 1 Basic: analyzes, strategies, perspectives. Springer Gabler, Wiesbaden 2015, ISBN 978-3-658-04934-8 .
  • Uwe Gresser: Practical Guide to High Frequency Trading . tape 2 Advanced: Products, Systems, Regulation. Springer Gabler, Wiesbaden 2017, ISBN 978-3-658-13876-9 .
  • Uwe Gresser: High-frequency trading: compact, understandable, up-to-date . Springer Gabler, Wiesbaden 2017, ISBN 978-3-658-19910-4 .

Web links

Broken link

  • Quotes from Lewis' book
  • Alf Mayer: Review. CULTurMAG Hamburg, CrimMag division, May 3, 2014

Individual evidence

  1. ^ Tyler Durden, Goldman's $ 4 Billion High Frequency Trading Wildcard. In: Zero Hedge. July 17, 2009, accessed May 12, 2010 .
  2. ↑ Alexis Johann: Billionaire software battle on Wall Street is to be stopped. (No longer available online.) Wirtschaftsblatt, July 27, 2009, archived from the original on April 21, 2014 ; Retrieved January 4, 2013 .
  3. ^ Mary Schapiro: Chairman Schapiro Statement on Knight Capital Group Trading Issue. In: sec.gov. August 3, 2012, accessed August 6, 2012 .
  4. ^ Daniel AJ Sokolov: Stock trading software gambled away 440 million dollars in 45 minutes. In: Heise-Online. August 4, 2012, accessed August 6, 2012 .
  5. ↑ Udo Rettberg: The stock exchange is about nanoseconds. In: Handelsblatt. May 10, 2010, accessed May 12, 2010 .
  6. ^ Bryant Urstadt: Stock Exchange on Speed. In: Technology Review. May 21, 2010, accessed January 11, 2011 .
  7. ↑ Bundestag wants to slow down high-frequency trading. In: Heise , February 28, 2013
  8. ↑ Simon Schmid: The author who divided Wall Street. In: Tages-Anzeiger .ch / Newsnet , April 3, 2014
  9. ^ Attorney General Eric Holder confirms federal investigation into high-speed trading. In: CBSnews.com , April 4, 2014
  10. ↑ Unless otherwise stated, the illustration of high-frequency trading is based on: Michael Lewis : The Wolf Hunters of Wall Street. In: New York Times , March 31, 2014
  11. ↑ Charles Duhigg: Stock Traders Find Speed Pays, in Milliseconds. In: New York Times. July 23, 2009. Retrieved October 24, 2012 .
  12. ↑ Jens Korte: In camera. ( Memento from January 16, 2010 in the Internet Archive ) In: Financial Times Deutschland , January 14, 2010
  13. ↑ Debate about high-frequency trading: lightning boys who move the whole market. In: sueddeutsche.de
  14. ↑ Perfect Pilfering. Nanex Research, July 15, 2014
  15. ↑ Stock exchanges bow to criticism of lightning trading ( memento from July 31, 2012 in the web archive archive.today )
  16. ↑ On this, Forst, Gerrit: Is high-frequency trading permitted in the European Community? In: Journal of Banking and Capital Markets Law (BKR) 2009, p. 454 ff.
  17. ↑ Financial Times Deutschland, August 10, 2009, page 19
  18. ^ Text and amendments to the High Frequency Trading Act
  19. ↑ Dr. Volker Baas and Mert Kilic, "The High Frequency Trading Act requires an amendment", Die Bank 04/2020, p. 54ff.
  20. ↑ Michael Lewis : The Wolf Hunters of Wall Street. In: New York Times , March 31, 2014
  21. ↑ Joachim Nagel: High Frequency Trading and Market Implications - An Assessment from the Central Bank's Point of View. Deutsche Bundesbank, July 4, 2012, accessed on November 29, 2016 .
  22. ↑ High-frequency trading: Asset manager Flossbach criticizes banks and stock exchanges. In: wiwo.de. Retrieved November 29, 2016 .
  23. ↑ Martin Ehrenhauser: The Money Robots - How high-frequency machines collect our savings and destabilize financial markets . Promedia, Vienna 2018, ISBN 978-3-85371-435-5 .
  24. ^ A b c Nadine Oberhuber: Stock exchange: "Dangerous for the stability of the market" . In: The time . August 31, 2015, ISSN  0044-2070 ( zeit.de [accessed November 29, 2016]).
  25. ↑ Christian Siedenbiedel: High Frequency Trading : Slaves of the Algorithm . In: Frankfurter Allgemeine Zeitung . January 19, 2013, ISSN  0174-4909 ( faz.net [accessed November 29, 2016]).
  26. ^ Jörg Hackhausen: High-frequency trading: "The stock exchange becomes a casino" . January 16, 2013 ( handelsblatt.com [accessed November 29, 2016]).
  27. ^ AFM evaluates the use of high-frequency trading (HFT) in European financial markets. AFM, November 29, 2016, accessed November 29, 2016 .
  28. ^ AFM evaluates the use of high-frequency trading (HFT) in European financial markets. In: afm.nl. Retrieved on November 16, 2016 (English): "This assessment changes if HFT were to be used to implement an illegal trading strategy, but in this respect as well HFT is no different from other trading strategies."
  29. ↑ Dr. Volker Baas and Mert Kilic, "Problems of algorithmic trading", BKR 2020, p. 394 ff.
  30. ↑ FIA, Reply on ESMA Consultation Paper on MiFID II / MiFIR, May 22, 2014, p. 35.
  31. ^ First London Review of Books , vol. 36, no. 11. From the English by Niels Kadritzke