In this report we examine the impact of High-Frequency Trading on markets; in particular, we assess liquidity, volatility and price discovery, which in most circumstances can benefit from the presence of HFT.
Algorithmic trading creates a set of risks, and we recommend making risk management an essential element of electronic trading. Within HFT implementation of risk management techniques becomes increasingly important as the complexity of the systems being used becomes more sophisticated. As such, a holistic approach to HFT risk management at key points in markets is needed.
We recommend that, in all cases, HFT players in capital markets must take a holistic approach to risk management. It should include business measures – a set of five checks in the risk management process – and technology measures like high standards of design, implementation, monitoring and management. On top of recommendations for traders, we highlight the importance of HFT risk management by trading venues.
The research is based on our hands-on experience working with Tier I and Tier II banks, hedge funds and leading vendors. Our analysis of HFT market trends is based on a survey of more than 50 industry participants from Africa, the Americas, Asia-Pacific, Europe and the Middle-East.
