High-frequency trading – a discussion of relevant issues - Xetra

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High-frequency trading – a discussion of relevant issues May 2013Protection mechanisms built into the market structure safeguard fairand orderly markets7Avanced Risk ProtectionIllustrationDescriptionTradingParticipant• Advanced Risk Protection functionality enablestrading participants and/or Clearing Members to setup to three limits on aggregate risk metrics, such asthe total margin requirement.7CentralCounterparty7ClearingMember• Upon breach of the first limit, an alert message issent.• At the second limit, the system automatically throttlesorders and quotes.Exchange(Eurex Exchange/Xetra)• At the third limit, the “stop button” functionality isautomatically triggered, thus halting all tradingactivities.54
High-frequency trading – a discussion of relevant issues May 2013Literature review (I/III)Author(s) / Title Dataset FindingsMarkets Committee, Bank for InternationalSettlements (BIS)“High-frequency trading in the foreign exchangemarket”, September 2011Brogaard"High frequency trading and its impact on marketquality", August 2010Brogaard“High Frequency Trading and Volatility”, October2011Hendershott, Riordan“High Frequency Trading and Price Discovery”(working paper)Jarnecic, Snape"An analysis of trades by high frequencyparticipants on the London Stock Exchange",June 2010CME Group"Algorithmic trading and market dynamics", July2010UK Treasury Foresight Committee (2011)“The Future of Computer Trading in FinancialMarkets”Various FX venues, notably Reuters and EBS,and various dates, notably May 6,2010 and March 17, 2011HFT vs. other trades. U.S. equities onNASDAQ, various periods in2008 –2010HFT vs. other trades. U.S. equities onNASDAQ, various periods in2008 –2010HFT vs. other trades. U.S. equities onNASDAQ, various periods in2008 –2010HFT vs. other trades. LSE equities,April – June, 2009Automated vs. other trades. CME futures, May2008 – May 2010Literature review of computer based tradingdevelopmentsHFT is found to be beneficial during normal marketperiods, with similar behavior to traditional marketparticipants during high volatility periodsHFT helped to narrow bid – ask spreads, improved pricediscovery and may have reduced volatilityHFT activity tends to decrease idiosyncratic and intradayvolatility.HFT trades were positively correlated with permanentprice changes and negatively correlated with transitoryprice changes, Suggesting that HFT improves pricediscoveryHFT improved liquidity and was unlikely to haveincreased volatilityAutomated trading was associated with improvedliquidity and reduced volatilityEconomic research thus far provides no direct evidencethat high frequency computer based trading hasincreased volatility.55
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