Tuesday, March 19, 2013

Increase in High Frequency Trading Not Linked to Increase in Execution Costs

The recent increase in high frequency trading has not resulted in a concomitant change in execution costs for institutional investors, concluded a report released by the UK Financial Services Authority. There was no observable relationship between high frequency trading and institutional execution costs. Since high frequency trading does not have a common definition, the report  defined it based on a couple of criteria. Our primary criterion is based on a definition that high frequency trading is a subset of Algorithmic Trading participants that use proprietary capital to generate returns using computer algorithms and low latency infrastructure.

The report said that it is possible that execution costs continue to decrease over the next decade for a variety of reasons. First, new entries may trigger price wars that end up with further reductions in clearing fees. Second, advances in technology might imply lower transactions costs. These changes in technology might lower barriers to entry.

Moreover, additional market players could appear in the sector, which may offer lower commissions than those that currently exist. Also,  new market players established in countries with lower operating costs could offer the same level of services at a lower price. In addition, new regulations fostering competition could increase competition for volume on a global scale, with a potential reduction of commissions charged by exchanges as more and more participants enter the market and compete for volume.