The Future of HFT and Stock Exchanges

October 3rd, 2016 by

bitcoinBetween the advent of lightning-fast trading algorithms and the increasing use of cryptocurrencies and blockchain technologies like Bitcoin, what the future will look like for the financial markets is in serious doubt.

We can choose to look at this development as either revolutionary or merely disruptive. No matter our subjective feelings about emerging technologies like the blockchain or high-frequency trading (HFT), these innovations are sure to change how banking, finance, and trading operate in the years to come.

Pros and Cons

Defenders of the use of high-frequency trading algorithms on Wall St point out that the enhanced speed helps market liquidity. Though sometimes frowned upon, this is the same argument offered to defend market arbitrage: it’s a necessary evil that helps keeps markets functioning. The same democratizing and decentralizing virtues have been extolled for blockchains, as well.

HFT-programIn the same vein, some have suggested that the technology enabling HFT has opened up access to high-level trading to many humble participants who wouldn’t otherwise have a way to compete. However, it seems increasingly clear that other traders without access to HFT can’t keep up with their high-speed counterparts.

There are questions about how damaging HFT is to transparency. When you combine digital solutions with the popularity of “dark pool” trading platforms, the potential for big players to manipulate markets free of accountability becomes an issue. In short, the digital nature of blockchains poses the same transparency problem.

Leveling the Playing Field

This is why some prominent voices have offered support for a new stock exchange known as IEX. The difference is that IEX wants to impose a “speed bump” for electronically executed trades in order to level the playing field against algorithmic trading programs.

One of the leaders in this kind of discourse is entrepreneur Patrick Byrne, who is the CEO of Overstock.com. He made some headlines regarding problems with markets when he said about a year ago that his company backs up its finances with a stockpile of gold and silver.

Similarly, Byrne has been working to introduce blockchain technologies that challenge traditional, mainstream models of finance. In fact, his firm issued the company’s stock as a digital security last year, a new milestone. A Politico interview with Byrne explores the “promise and threat in the blockchain.” It continues: “[Blockchain] technology shares and checks information across many computers, so advocates say it’s a tool for transparency and security. But it also radically decentralizes money, leaving it unclear how blockchain-based markets can be policed under the current system.”

Significantly, the Commodity Futures Trading Commission (CFTC), a regulatory body in the U.S., has classified Bitcoin as a commodity rather than a currency. This means it can be traded (and regulated) accordingly.

How these disruptive technologies fit into the broader regulatory framework remains to be seen. Regardless of how you look at it, it’s undeniable that HFT and the blockchain are shifting the landscape of the financial markets in profound—if yet undetermined—ways.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.