Blockchain offers banks potential, but HFT provides benefits now

Bill Harts, Modern Markets Initiative: HFT provides benefits now

I’ve been a technology nerd since before it was cool. In fact, when I went to college in the mid-1970s engineering students were treated more like George McFly than Mark Zuckerberg. It wasn’t the most glamorous major to talk about.

Not much has changed today when I tell people I lead an advocacy organisation in support of high frequency trading (HFT), a technology that lowers trading costs for banks, asset managers and pretty much all investors. I find the work exciting, but I do run into my share of Biff Tannens.

So I’ve been surprised, and admittedly a little envious, of the genuine enthusiasm and support generated by blockchain. As one industry observer put it, hype around blockchain “has managed to make that boring back-office coordination work sexy”. It’s received so much publicity I’ve felt like saying “hey, while blockchain may be the next big thing, we’re supplying cool technology to banks right now!”

Well, maybe I wouldn’t go that far, but high frequency trading technology is already being pressed into service in the banking industry in a big way. From joint ventures to partnerships to outsourcing relationships, tech-savvy bankers and traders have caught on to the worst kept secret on Wall Street – high frequency trading makes their jobs easier! Put more eloquently – banks that leverage high frequency trading capabilities can provide even better pricing and liquidity to their customers.

This statement shouldn’t be all that surprising to those that closely follow our industry given the leading role that high frequency trading has played in improving market quality over the past decade or so. During this period, retail commissions have fallen by more than $20 per trade and bid-ask spreads have collapsed, leaving more room for investors to profit. I could go on and on, but you get the point and so have some of the world’s biggest banks.

While these financial institutions are grappling with tougher regulations, rising technology costs, and a number of global economic hurdles, high frequency trading has quietly become a critical ally. It has changed the way that banks, and even asset managers, are interacting with their core customers on a daily basis.

Don’t get me wrong. These firms continue to do what they do best – provide scale and maintain long-standing client relationships. But working in tandem with nimble, high frequency trading professionals – innovative firms that focus solely on utilising their electronic trading prowess to offer tight pricing – is changing banking, allowing such firms to operate the same capital-intensive businesses with a lower cost base and a potentially higher margin.

Consider the following examples:

• Last spring, automated market maker and Modern Markets Initiative (MMI) member firm GTS agreed to buy Barclays Plc’s Designated Market Marker (DMM) business on the New York Stock Exchange floor, giving the firm responsibility to oversee trading for more than 1,200 blue chip securities. Following this transaction, GTS is leveraging these corporate relationships to partner with banks, helping them to trade in other asset classes such as foreign exchange.
• Credit Suisse Group’s Wake USA formed a partnership with MMI member firm Tower Research Capital. That arrangement allows the Swiss bank to leverage Tower’s technology platform to manage its customer-facing electronic rates business.
• And recently, Virtu Financial Inc, another global electronic market maker, announced a three-year agreement with JP Morgan Chase & Co. to help the bank trade more efficiently in the US treasury market.

The end goal of these relationships is clear: banks benefit from the expertise of third party specialists who complement and enhance their bread and butter trading businesses. In an era of uncertainty, in which economic turmoil, low interest rates and emerging fintech competitors are, at any given time, posing legitimate threats to their business models, banks have an opportunity to turn such relationships into strategic advantages.

Further engagement with HFT technology helps banks navigate choppy markets by leveraging those firms best suited to provide continuous liquidity. If there’s one lesson that turbulent trading days have taught the marketplace, it’s that high frequency trading is adept at steering through adverse conditions, even as others retreat.

If my calculations are correct, when more banks expand their use of proven, electronic trading partnerships, you’re gonna see some serious… savings.

By Bill Harts, CEO of the Modern Markets Initiative (MMI), the organisation dedicated to education and advocacy on the benefits of automated, high frequency trading