Today’s financial markets can be summed up in three words – global, fast, and complex. But as the market structure evolves, so must the regulatory structure that oversees it. John Lothian News has spoken with several industry experts to create this series on the evolution of financial market structure.
In Part 1, industry spokesman Peter Nabicht looked at the sudden interest in high frequency trading in the wake of Michael Lewis’ book Flash Boys, and voiced concern that hasty changes to market structure may have unintended consequences. (View Part 1)
In Part 2, Nabicht explains in greater detail the market structure and, in particular, the nature of liquidity. While he agrees with HFT critics who say there is a difference between volume and liquidity, he disagrees with those who say high speed liquidity providers do not provide sufficient liquidity, especially in times of market stress.
“Liquidity,” says Nabicht, “is supply meeting investor demand to get in and out of positions at an effective price, in a timely manner, and with enough supply to meet demand. Professional traders using high-frequency algorithms have aided all of these elements.” He then points to some of the recent research on HFT liquidity that have backed up his claims.
Nabicht, senior advisor of the Modern Markets Initiative, an advocacy group focused on algorithmic trading, is no stranger to today’s markets. After spending several years as a programmer, he spent six years as the Chief Technology Officer at Allston Trading, a Chicago-based proprietary trading firm that uses high speed algorithms in its market making activity.
Nabicht advocates more simplicity in the market. “The more we simplify the market structure, the less fragile the structure will be and the easier it will be to understand. People are more confident in that which they can understand.”