High Frequency Trading Systems

Recently in Japan, Kiyohiko Nishimura the Deputy Governor of the Bank of Japan remarked that algorithmic trading systems could lead to market instability. This statement caused a great deal of controversy as politicians and regulators line up against each other within the trading community.

In some ways he is correct. Algorithmic trading programs are basically software. A software program is only as effective as the input from the end user. Because software programs cannot reason, these systems lack the key trading ingredient of common sense. If a system were designed that had instincts and decision making abilities, then most if not all high frequency traders would be out of a job.

At an International Finance forum held in Tokyo, Mr. Nishimura argued that more balance is required between the reliance on trading software programs and the human traders who control them. Japan is still well behind the United States in the percentage of trades attributed to algorithmic and high frequency trading. The US is currently at 70% and Japan is close to 30% but that figure is on the rise.

Although most agree that algorithmic trading systems and the firms that utilize them contribute to the overall efficiency and stability of the market during normal trading activities, in times of stress or extraordinary events these systems break down and the human element must take charge.

Mr. Nishimura urged his colleagues in the trading community and others who participate in the market not to make the same mistakes that were responsible for market instability in other countries throughout the world. In response to his concerns, Japan has proposed new regulations and or restrictions in their trade practices. As an example, there may be measures taken to pause trading when price limits have been reached. Another proposed measure would be to throttle throughput so that no one firm could place more than a predetermined number of orders per second.

High Frequency Trading is often complex. More balance in the relationship between human trader and system software is definitely recommended.