Global volume of exchange-traded derivatives approached 25 billion in 2011, largely on the strength of high-frequency trading (HFT). Most exchanges expect that trend to continue, and are ramping up their trade-matching engines to accommodate it. For example, come December, Eurex will be running on the super-fast Optimise engine developed by its International Securities Exchange (ISE) subsidiary.
But market participants and end-users alike are losing their enthusiasm for HFT, and the overall futures terrain is littered with the detritus of the MF Global debacle and the lingering effects of both the 2008 financial crisis and the 2010 flash crash.
All of these issues might best be understood as part of a larger debate over the relative merits of efficiency and resiliency. It’s a debate that former JP Morgan Managing Director John Fullerton laid out for us in February in “The Financial Transaction Tax: Panacea, Pathogen, or Just a Bitter Pill?”
“Basically, efficiency is the ability of a system to grow and expand and process throughput, while resiliency is the ability of a system to recover from a shock,” Fullerton said. “Economics has tended to focus on maximizing efficiency, but resiliency is only now getting widespread attention.”
He was speaking in defense of a proposed financial transaction tax (FTT), which would tax a small portion of every trade to support regulators or simply reduce speculation, but the subtext has been evident everywhere this past year — even on panels at the World Economic Forum in Davos, Switzerland. There, two former central bankers (one-time European Central Bank boss Jean-Claude Trichet and one-time Mexican central bank governor Guillermo Ortiz) joined the current head of the UK Financial services Authority Adair Turner in questioning the value of HFT.
“The acid test here is to ask yourself whether new products and innovation [are] something that benefit directly or indirectly the real sector of the economy, the households,” said Ortiz. “Does it help to better allocate resources, does it help distribute risk better, or are we just talking about bets that are being taken in the financial sector and have nothing to do with the real economy?”