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.