HFT: Get rich risk-free


French Banker Jean-Pierre Pinatton wants to get rid of rapid machine-based high frequency trading (HFT).

Investment bank Oddo & Cien’s Chairman of the Board Jean-Pierre Pinatton believes that the only people benefiting from HFT are HFT traders. They are true professionals that have found a way to make money without risk, at the expense of investors, without investing any of their own money.

– HFT is a modern way of carrying out illegal and forbidden front running trading, where the broker buys shares in accordance with a customer’s transaction and sells them immediately to the customer for profit, Pinatton summarises.

– HFT is exactly the same – carried out, however, in a fraction of a second using algorithms.

When your business idea is to be faster than your customer, trades are carried out at the expense of true investors and no one knows what the real price level is, as fake bids flood the system.

– Arbitrage trading that utilises the price difference between different trading venues also breaks the rule, according to which customers’ transactions are to be carried out at the best possible price.

According to Pinatton, HFT does not actually increase liquidity, as the duration of the holding can be just a few milliseconds and all positions are closed at the end of the day.

– These people are not investing, they are playing a game. A market maker should put its money on the table and take a risk.

A race for mathematicians

– No parallel can be drawn between the tool and its user, Pinatton reminds us. Oddo also uses algorithmic tools that help make the implementation of customers’ transactions more efficient through the use of machines. These should not, however, be confused with HFT.

– Our algorithms are intended to benefit the customer, Pinatton states.

Ultimately it comes down to the objective of the team that created the software.

– The creation of algorithmic tools used in HFT is like playing computer games and a speed race between teams consisting of top mathematicians – it makes no financial sense.

This is also true of the competition over computer and connection speeds. Absurd amounts of money are invested in them without any actual economic benefit – just so that HFT traders can play their games.

– While investment objects are thoroughly considered and assessed in normal trading, HFT players are not even aware of what shares they have just bought and sold within a couple of milliseconds.

The dark side of the coin

In addition to HFT traders trying to benefit from trends, some also try to create their own trends with illegal fake bids. Pinatton says that this is easily detected. The problem with controlling the phenomenon is that there is no uniform supervision system in Europe and each country controls its own market.

– Some of the manipulation is carried out in Paris, some in London, which means that the local authorities do not see the entire pattern. It is extremely frustrating for them.

A joint supervision authority, which would collect all trading and bids made in Europe into one data system, would naturally catch the abusers. According to Pinatton, however, the creation of such a system would be extremely expensive and therefore no one has suggested it.

– In many countries, the authorities only supervise actual trades and do not pay attention to bids that have not been realised. In these countries, fake bids disappear from the screens within a few milliseconds.

Efficient brakes

HFT trades were created as a by-product of the liberation of stock exchange transactions when stock exchanges started competing over speed.

– As new, fast players have appeared, traditional trading venues have been forced to enter the technology race, whether they want to or not. Many feel that the major investments made in technology and speed have only benefitted HFT traders.

Pinatton proposes a few ways of controlling HFT trades: these would include increasing the smallest possible tick size, changing milliseconds to seconds, and a transaction tax, which would probably be the most effective method.

– For instance, a one euro fee for a single trade would not be a problem for normal stock exchange transactions, but it would affect a trader that carries out 300 transactions a minute with low margins, Pinatton suggests.

– And now it is finally starting to look as though politicians are beginning to understand how absurd the current situation is and are starting to do something about it.

Text: Jussi-Pekka Aukia

Share article