Presentation to the 

Commodity Futures Trading Commission 

Technology Advisory Committee

December 13, 2011
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Defining “HFT”

• Commissioner O’Malia has proposed a definition of “High 

Frequency Trading” or “HFT” because:

– “CFTC needs to collect reliable data so it can define their 

trading activity before imposing regulations.”

• Potential uses of definition:

– market structure research

– risk controls

– surveillance

• Should be neither too broad nor too narrow

• Definition could require arbitrary thresholds

– “high”, “numerous” and “very-short”

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Alternative Approach

• A flexible and easy-to-implement proposal

• Define a universe of “Direct ATS Participants” based on:

– use of Automated Trading System (“ATS”) and,

– direct connection to an exchange

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Direct ATS Participants

4

TRADING	

Principal

Agency

DIRECT	

CONNECTION	

AUTOMATED	

TRADING
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Leverage Existing Resources

• Exchange resources currently exist to study this group

– complete audit trails of every order and trade

– Automated Trading System definitions and tags:

• CME defines as “a system that automates the generation 

and routing of orders”

• tag 50 maps to individuals and Automated Trading Systems 

responsible for order submission

– exchange membership documents

• Data can be sorted and filtered based on dynamic criteria:

– order rates, turnover rates, trading frequency, etc.

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Benefits

• Direct ATS Participant approach should:

– avoid need for arbitrary thresholds

– be available quickly and easily with existing resources

– provide flexibility for research and surveillance

– assure that risk controls apply broadly

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Context -- Modern Automated Markets

• Nearly all aspects have been automated

– market data, order entry and trade matching 

– back-office, clearing and settlement

• Have become more transparent and competitive due to 

regulatory change and technology

• Today, all classes of market participants use computers and 

automation

– investment banks, broker-dealers and FCMs

– investment funds, hedge funds and CTAs

– independent principal trading firms

– retail brokers and some retail investors

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Modern Professional Trading

• Professional trading has always been 

important to financial markets, providing 

liquidity and contributing to price discovery

• As markets have become electronic, 

transparent and competitive, most 

professional trading has been automated

• New market participants (many from outside 

traditional financial centers) have been able 

to compete on level playing field

• Improved market quality has saved investors 

and hedgers billions of dollars 

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So what do we do?

• People have labeled some automated trading as “high frequency 

trading” but the term has not been well defined

• What we do is:

– collect publicly available market data

– analyze the data using quantitative and statistical approaches

– form opinions on “fair value”

– use computers to automatically enter orders to buy and sell 

– do this many times a day across many instruments, and 

– carefully manage risk

• While many of our processes are automated, there are people 

behind every trade. People design our systems and strategies, 

program our computers, supervise trading and help manage risk

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Market Quality Benefits

• Competition among professional traders with diverse views of 

fair value improves market quality for investors and hedgers

• According to numerous empirical studies, these benefits include:

– lower trading costs

– fairer prices and less micro-volatility

– more resilient markets

– increased liquidity

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Literature Review

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Author (s) / Title Dataset Findings

Angel, Harris, Spatt

"Equity trading in the 21st century", February 2010 

U.S. equities, 1993 – 2009 Trading costs have declined, bid-ask spreads 

have narrowed and available liquidity has 

increased

RGM Advisors

“Market Efficiency and Microstructure Evolution in US 

Equity Markets: A High Frequency Perspective”, 

October 2010

U.S. equities, 2006 - 2010 Bid-ask spreads have narrowed, available liquidity 

has increased and price efficiency has improved

Credit Suisse

“Sizing Up US Equity Microstructure”, April 2010

U.S. equities, 2003-2010 Bid-ask spreads have narrowed, available liquidity 

has increased and short-term volatility 

(normalized by longer term volatility) has declined

Hasbrouck, Saar

“Low-Latency Trading”, May 2011

U.S. equities, full NASDAQ order 

book, June 2007 and October 

2008

Low latency automated trading was associated 

with lower quoted and effective spreads, lower 

volatility and greater liquidity

Hendershott, Riordan

“Algorithmic Trading and Information”, August 2009

Automated vs. other trades. 

Deutsche Börse equities, January 

2008

Automated trades made prices more efficient and 

did not contribute to higher volatility 

Chaboud, Hjalmarsson, Vega and Chiquoine

“Rise of the Machines: Algorithmic Trading in the 

Foreign Exchange Market”, October 2009

Automated vs. other trades. EBS 

forex market, 2006-2007

Automated trades increased liquidity and may 

have lowered volatility 

Markets Committee, Bank for International 

Settlements (BIS)

“High-frequency trading in the foreign exchange 

market”, September 2011

Various FX venues, notably 

Reuters and EBS, and various 

dates, notably May 6, 2010 and 

March 17, 2011

HFT is found to be beneficial during normal 

market periods, with similar behavior to traditional 

market participants during high volatility periods

Brogaard 

"High frequency trading and its impact on market 

quality", August 2009

HFT vs. other trades. 

U.S. equities on Nasdaq, various 

periods in 2008 – 2010

HFTs helped to narrow bid-ask spreads, improved 

price discovery and may have reduced volatility

Brogaard 

"High Frequency Trading and Volatility”, October 2011

HFT vs. other trades. U.S. equities 

on NASDAQ, various periods in 

2008 - 2010

HFT activity tends to decrease idiosyncratic and 

intraday volatility

Hendershott, Riordan

“High Frequency Trading and Price 

Discovery” (working paper)

HFT vs. other trades. U.S equities 

on NASDAQ,various periods in 

2008 - 2010

HFT trades were positively correlated with 

permanent price changes and negatively 

correlated with transitory price changes, 

suggesting that HFT improves price discovery
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Literature Review

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Author (s) / Title Dataset Findings

Jarnecic, Snape

"An analysis of trades by high frequency participants 

on the London Stock Exchange", June 2010

HFT vs. other trades. LSE 

equities, April – June, 2009

HFTs improved liquidity and were unlikely to have 

increased volatility

CME Group

"Algorithmic trading and market dynamics", July 2010

Automated vs. other trades. CME 

futures, May 2008 – May 2010

Automated trading was associated with improved 

liquidity and reduced volatility

Menkveld

“High Frequency Trading and the New-Market 

Makers”, April 2011

Dutch equities traded on ChiMX 

and Euronext, 2007

A single high frequency trader played an 

important role in the development of a competitive 

market center, resulting in better liquidity and 

lower trading costs 

Lepone

“The Impact of High Frequency (HFT): International 

Evidence”. September 2011

HFT vs. other trades. Singapore 

Exchange (SGX),Australia 

Securities Exchange (ASX), 

NASDAQ and London Stock 

Exchange

HFT has become a major provider of liquidity, 

particularly during periods of market uncertainty

Hendershott, Jones, Mankveld

“Does Algorithmic Trading Improve Liquidity?, 2007

Automated quoting facility, NYSE 

equities, 2003

Automated trading narrowed bid-ask spreads, 

lowered trading costs, and improved price 

efficiency

Riordan, Storkenmairm

“Latency, Liquidity and Price Discovery”, 2009

Xetra high-speed trading system, 

Deutsche Börse, 2007

Higher system speeds led to increased liquidity 

and improved price discovery

Hendershott, Moulton

“Automation, Speed and Stock Market Quality: The 

NYSE’s Hybrid”, February 2010

NYSE TAQ database plus others, 

June 1, 2006 - May 31, 2007

Introduction of automation via the NYSE hybrid 

system improved price discovery and made prices 

more efficient

Gomber, Arndt, Lutat, Uhle

“High-Frequency Trading”, March 2011

Various Survey paper that highlights beneficial aspects of 

HFT, while noting that perceived problems are 

largely a result of U.S. market structure
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13

Questions