Bourse operator London Stock Exchange Group plc (LSE.L) has welcomed high-frequency traders, saying that they are a source of liquidity, according to a report in the Financial Times on Monday. The move comes even as these market participants have come under regulatory scrutiny in the U.S. for exacerbating market volatility amid the credit crunch.
According to the FT report, Xavier Rolet, the chief executive of the London Stock Exchange, or LSE, said, "We welcome them. They are a source of liquidity and we do not rank any particular source of liquidity higher than any other. You need diversity in the types of liquidity."
The LSE had earlier this month abandoned a tariff fee, introduced by the exchange's previous chief executive Dame Clara Furse, aimed at attracting high-frequency traders from Chicago and Europe, and replaced it with a simpler system of volume discounts. The move by the LSE had raised eyebrows, highlighting the growing clout of these new breed of traders.
High-frequency trading firms that trade on the LSE include Chicago-based Getco LLC, which has a London office, and Netherlands-based Optiver.
According to the FT report, Rolet noted that high-frequency trading accounted for in the region of a third to 40% of equities trading on the LSE. He reportedly added that it was a mistake to club high-frequency traders together as the same trading methods were also used by some banks and hedge funds.
Rolet cautioned that regulators should remain vigilant so that at the end of the day, the central marketplace remained neutral. He said that the regulator needs to step in to determine if a particular way of trading is a legitimate business of advantage or whether it accesses in an unfair fashion certain information that is not available to other players.
In recent years Europe's top brokers have become frustrated with the London Stock Exchange as well as other exchanges for their refusal to cut fees or invest in systems, prompting them to set up rival platforms such as Turquoise.
High-frequency trading is a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. Traders use complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.
In the U.S., high-frequency traders have come under scrutiny by regulators seeking to establish whether these traders have too much influence over markets. High-frequency trading is said to have helped hedge funds and banks in the U.S. to make money so soon after the financial system nearly collapsed. It has also helped activity on the U.S. stock exchanges to expand significantly.
High-frequency traders, however, often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. These traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders.
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