Brics catch high-frequency trading habit

A trader checks financial data on a terminal
Image caption Fast and furious automated trading is spreading across the globe





"The Bric (Brazil, Russia, India and China) countries are where it's at right now," says Dr John Bates, executive vice-president and chief technology officer of Progress Software, a company that has pioneered new techniques in what are known as quantitative trading programs.

"We've seen it grow very quickly in Brazil. It's done what happened in London and New York much more quickly. Now we're seeing the same trend in India and China and even, embryonically, in Russia."



"The adaptation is faster and they can leapfrog the mistakes that have been made in other places," he says.

Backlash looms

Dr Bates says India is already following suit and will see even more automated trade in the next few years: "The market's gone very electronic there." But India is also seeing the first stirrings of disquiet at the spread of high-frequency trading.

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Media captionIan Ellis, director at Ride Arcade Limited, explains how electronic trading works


"As there is a rush towards reducing transaction time in the name of high-frequency trading, the question we need to ask is what purpose are we serving by reducing trading time to eight microseconds or even two microseconds. Is this justified?" he told the Asian Financial Forum in Hong Kong in January.




"Limiting the spread of these trading techniques, the benefits of which are dubious, will make our markets more stable and clearer for investors without jeopardising genuine liquidity," he told the European Parliament in December.

In the US, meanwhile, regulators such as the Commodity Futures Trading Commission are struggling to define what high-frequency trading actually is. As one member of the commission put it: "We want to understand what we're regulating."

Traffic police


In Mr Jouyet's view, this was caused by what he calls "trend-following volume". In other words, a whole host of different automated traders, using the same algorithms, carried out similar trades at the same time, reinforcing the market downturn and magnifying its impact.

Progress Software's Dr Bates recognises the dangers, but compares them to the risks involved in driving a fast car.

"If I were to get into a Ferrari and drive off like a lunatic, I could cause damage to myself and others," he says. "But hopefully, there would be some traffic police out watching and they would be able to pull me over before I got into trouble."

For him, that means having regulatory supervision that uses the same techniques as high-frequency traders, in order to spot when they are going wrong. And in fact, Progress Software has been working with the UK's Financial Services Authority and many leading banks to do just that.

"We've been involved on both sides of that story," he says. "It's very possible to spot a trade that's gone out of control. It's very possible to spot an algorithm that's gone out of control and shut it down before it does harm.


'Race to zero'


As well as the right software, you need hardware that can deliver the speed you need - or, in the jargon of the industry, you need a digital network with ultra-low latency.

"If you have the fastest network, you're the sexiest girl in the class, you're the top boy," says Fraser Bell, managing director of BSO Network Solutions. "It's as simple as that."



"There's a massive global drive for speed," says Mr Bell, who sees himself as locked in a "race to zero" with rival network operators.

Image caption Meet the modern co-ordinator of algorithms

The fiercely competitive nature of his business is clear. BSO's website urges financial firms to sign up with it "because a millisecond can cost millions".

And whereas a company in any other line of business might sign a three-year or five-year contract with an IT services provider, BSO's service-level agreements might be for as little as one year. Like a mobile phone contract? "Exactly," says Mr Bell.

But if trades are being placed by robots and then being supervised by robots, where is the human element in all this? Well, Progress Software's Dr Bates says it is still "critically important".


"But now the trader is a high-level co-ordinator of algorithms, the validator of the algorithmic suggestions. It's not Skynet taking over the world," he says, referring to the villainous computer system in the Terminator films.

Clearly the network builders and the mathematicians are thinking quite differently from the regulators about ultra-fast trading. The race to zero could end up facing speed bumps in the future.

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