Ataques a Infraestructuras Críticas

In the last decade, European equity markets have experienced evolutionary changes in their infrastructure and trading methodologies. The introduction of new technologies and greater competition has led trading venues to cater for automated trading and investment firms to invest in algorithmic trading and high-frequency trading (‘HFT’) technologies.28 _{These developments stimulated} new investments in market infrastructures (in particular, new trading platforms). Speed and likelihood of execution have become increasingly key aspects for professional investors, seeking to reduce the market impact of their orders. As a matter of fact, new trading methodologies and technologies have entered the scene and they seem to be here to stay.29

Evolutionary changes

Currently, more than a third of the transactions executed on the UK FTSE 100 are made through HFT systems (see Table 2) and much more through algorithmic trading. In the US, this number was between 40% and 60% of the average daily volume in 2009 (Celent, 2009) and is set to be above 70% in 2010, as estimated in a recent survey by Aite Group. Trading venues and broker- dealers have invested massively in technology to accelerate and improve trade execution through the use of sophisticated algorithms and to improve capacity. The NYSE’s speed of execution for small, immediately executable orders was 10.1 seconds in January 2005, compared to 0.7 seconds in October 2009 (SEC, 2010a, p. 6). NYSE Euronext Paris is going to move its servers to London to reduce latency and to be closer to the main trading community in Europe, while the LSE Group – after the acquisition of the IT firm Millennium – has

High- frequency

trading

28 _{HFT is a form of high-speed automated trading that it is often use by arbitrageurs and by professional investors} in order to improve their trading strategies, often supported by complex algorithms.

29 _{For a more detailed analysis about the link between new technologies and current market structure, see section} 5.5.2.

launched an infrastructure called ‘Millennium Exchange’, to which Turquoise has recently migrated, while the main markets and third parties’ markets – such as Oslo Børs – will migrate in 2011.

Table 2. Share of HFT by trading venue (shares of order books)

Trading venue High-Frequency Tradinga

Chi-X 40% London Stock Exchange 32% BME 25-30%b NYSE Euronext 23% Borsa Italiana 20% Turquoise 19%b Nasdaq OMX 13%b

a _{* % of total trading value.} b_{% of total trading volumes.}

Source: CESR responses to consultation paper on micro-structural issues in CESR (2010d).

A report prepared by a Working Group chaired by Pierre Fleuriot and commissioned by the French Minister for the Economy, Industry and Employment has listed the main trading strategies that can be pursued through HFT systems (Fleuriot, 2010):

• Market-making (orders sent to capture the spread); • Arbitrage (instantaneous or statistical); and

• Speculation (event-driven strategies to predict future price movements). This set of strategies falls under those typical functions served by dealers and informed traders in financial markets (Harris, 2002). On the one side, algorithmic trading (AT) and more specifically HFT systems generally allow a faster and more efficient flow of information into prices, with potential price discovery and gains in spreads (Hendershott, Jones & Menkveld, 2008 Brogaard, 2010). AT also seems to continue after market shocks and benefit from price reversal (Broogard, 2010), and somehow from assets volatility without necessarily adding up to a generally highly volatile scenario. HFT is concentrated on most liquid stocks (Nasdaq OMX, 2010). On the other side, these systems could put trading platforms under severe stress by increasing volumes and speed to critical levels. Its use is expected to grow substantially in the coming years, as technologies become more widely available to investors. Only the effects of their widespread diffusion will clarify the real benefits and costs of technological developments. However – as any other trading tool in financial markets – HFT systems may be used beyond their general purposes. In this sense, some market participants may want to pursue more aggressive trading strategies such as quote stuffing.30 _{Regulators should therefore}

HFT strategies

constantly supervise the actual use of these complex tools, set common technical standards, and define legal boundaries.

AT and HFT systems, in fact, are often erroneously seen as trading strategies, while they are only tools that allow high-speed computation of orders, new and more efficient trading strategies. However, AT and HFT have boosted new trading strategies, such as statistical arbitrage, which have now become an essential aspect of end investors’ trading decisions.31 _{Banks are} continuously developing and fine-tuning their order-routing systems to remain competitive. Quantitative automated trading strategies, such as smart order routing through algorithmic trading, have become mainstream in trade execution and minimise the risks of sourcing liquidity to reduce market impact. Quantitative strategies based on high-frequency trading tools are now a more significant component of the market, and the success of this technological progress has actually encouraged more entrants. In effect, these sophisticated algorithms ought to slice big orders into small ones (so-called, ‘child orders’) and spread their execution in a set time frame and price range during the trading day. This substantially reduces risks of market impact. Overall, algorithmic trading seems to consume liquidity when it is cheap, and supply liquidity when it is expensive, that is when spreads widen. This beneficial outcome does not seem to increase volatility either (Hendershott & Riordan, 2009).

New trading technologies

Moreover, trading platforms offer services to financial institutions in order to install their servers close to their data mainframe and reduce their latency. Other services to reduce latency, such as Direct Market Access (DMA) and Sponsored Access (SA),32 _{allow entities to directly or indirectly access a} trading platform with different levels of responsibility and controls over their actions (see Section 5.5.2). These new access and low-latency services are critical for certain advanced trading strategies and seem to be a source of competitive advantage for trading venues. In addition to them, other access services – such as unfiltered access33 _{– may be important for high-frequency trading systems.} However, they bring new risks for the infrastructure, which need to predispose adequate systems and controls to monitor and manage potential misbehaviours or human errors (so-called ‘fat fingers’).

Market access

In conclusion, despite the indirect benefits of the availability of new technologies in financial markets (lower trading costs), retail investors remain only partially able to access technologies that facilitate their access to multiple trading venues (e.g. lack of consolidated data solutions). In effect, these technologies may benefit retail investors as long as they are used to promote easier and cheaper access to pan-European markets. Nevertheless, retail investors may have benefited from a modest downward trend of trading costs,

Retail investors

introduction and instantaneous cancellation of a huge amount of orders in order to slow down the competitors’ systems, gain processing time and deceive the market.

31 _{Using data from listed firms, Hendershott and Riordan (2009) found that almost 50% of liquidity on Deutsche} Börse is comes from algorithmic trading. On Nordic markets, 40% is algorithmic trading and only 7% is ‘pure’ HFT (Nasdaq OMX, 2010).

32 _{See Section 5.5.2.}

33 _{Unfiltered access is a sort of ‘naked’ sponsored access, in which the members’ client can place an order on the} trading platform that flows directly into the markets without a first screening of broker-dealer systems.

as a consequence of an increasingly competitive environment.