
HFT's Treasury market penetration a clear concern
Dominance of opaque shops poses concentration risks

Following the furore over Libor and foreign exchange rigging, goodwill towards dealers is in short supply.
So perhaps it makes sense that dealers are picking a fight with the one group in finance that elicits an even more negative reaction from the public – high-frequency traders (HFTs).
But why? One of the main complaints is that HFTs use their superior technology to front-run dealers – cheating them out of pennies per trade, which over the course of thousands of trades adds up to a tidy profit.
The banks are hardly innocent bystanders, but following the prohibition on proprietary trading, they are almost exclusively buying and selling on behalf of end-users such as pension funds and corporates, which can explain the wider anger.
Some of it may also be existential. You could argue that high-frequency trading's increasing dominance in equity and fixed-income trading represents a point where lines of code buried in an algorithm have triumphed over human relationship-based trading. To borrow a quote from the poet Dylan Thomas, bank traders slamming the march of HFTs may just be raging against the dying of the light.
It could also be because nobody seems to knows much about these HFT shops. They make very few public statements, rarely speak to the press and, ironically, have little or no web presence. If they do speak in defence of their activities, it's to argue that they're providing liquidity at a time when dealers complain it's draining away. It's a fair point, but one dismissed by banks who claim the liquidity they provide is illusory.
The opaqueness of HFT firms should really worry anyone that relies on US Treasuries, either as a pricing input or as a trading instrument in their own right. The interdealer market is now dominated by these unregulated entities – as revealed by Risk – with highly regulated banks only providing a small fraction of liquidity on some platforms.
Will HFTs continue to make prices in Treasuries in times of severe volatility, or will they pull the shutters down to protect their own interests? Only they know for sure. However, a situation where arguably the world's most important bond market is heavily reliant on entities whose motivations are unknown is clearly a cause for concern.
Lukas Becker
(Duncan Wood is away)
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Derivatives
Collateral markets in need of rewiring
New data suggests a tech upgrade is needed to avoid a large central bank footprint in markets
Dutch pensions have extra year to restructure hedges
January 2028 implementation date allows more time for long-dated swaps to roll off
Fast LPs accuse rivals of maxing out last look response times
Firms with sub-10ms checks complain of losing volumes to slower rivals, prompting one to ditch ECNs
Swap Connect shines light on US client clearing hurdles
New scheme may intensify calls for CFTC to reassess its exempt DCO limitations
US life insurer index options market hits $1trn mark
Counterparty Radar: Lincoln Financial emerges as top player in Q4 with $43 billion portfolio increase
Long-end euro swap pricing anomaly remains largely untapped
Deviation in swap curve attracts limited interest because of regulatory and pension reform barriers
SG1 growth slower than expected, say LPs
Despite sluggish take-up of Singapore FX matching engines, some hope a new NDF venue will offer a boost
Eurex scrambles to avert Treasury collateral ban on US default
Current policy prevents CCP from selectively excluding eligible collateral